EGGHEAD INC /WA/, 10-K/A, 1996-07-29

EGGHEAD INC /WA/
10-K/A, 1996-07-29
COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)

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(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934 For the fiscal year ended March 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934 For the transition period from to
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Commission file number 0-16930
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EGGHEAD, INC.
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(Exact name of registrant as specified in its charter)

WASHINGTON 91-1296187
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

EAST 22705 MISSION
LIBERTY LAKE, WASHINGTON 99019
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (509) 922-7031
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to
Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE
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(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K
------

To the best of Egghead, Inc.'s knowledge, the aggregate market value of the
voting stock held by non-affiliates of the registrant at July 22, 1996 was
$161,578,331.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

OUTSTANDING AT
CLASS July 22, 1996
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Common Stock, $.01 par value 17,580,278 shares

DOCUMENTS INCORPORATED BY REFERENCE

[None]

<PAGE>

PART I

Item 1. BUSINESS

GENERAL

Egghead, Inc. (Egghead or the Company), a reseller of personal computer
(PC) software, hardware, and related products, serves small businesses and
individuals through retail outlets and mail order. As of March 30, 1996,
the Company operated 164 retail stores, a direct response group, and Elekom
Corporation (ELEKOM), all of which are included in continuing operations.

The Company has also historically served corporate, governmental, and
educational customers through its corporate, government, and education
(CGE) division. On March 25, 1996, the Company announced the sale of the
CGE Division to Software Spectrum, Inc. (SSI), a Texas corporation, for
$45.0 million in cash which did not include the CGE division's receivables
and inventory that Egghead is liquidating in an orderly manner, all of
which are expected to result in total gross cash proceeds of approximately
$90.0 million. The sale, which was effective, May 13, 1996 included a
Fulfillment Agreement relating to the provision by Egghead to SSI of
certain support services for a period not to exceed 120 days and a Call
Center Lease detailing the lease for a period of three years of a portion
of Egghead's Spokane facility to SSI. (Exhibits on Form 8-K filed May 23).
Information contained in this filing excludes, unless otherwise stated, any
data relative to the discontinued operations of the CGE division.

Egghead, a Washington corporation, was incorporated in 1988 and is the
successor to a corporation which was incorporated in Washington in 1984.
Egghead is the parent company of DJ&J Software Corporation, Eggspert
Software, Ltd. (Eggspert), EH Direct, Inc., Egghead International, Inc.
(Egghead International) and ELEKOM. Eggspert and Egghead International
became inactive subsidiaries on May 13, 1996 following the sale of the CGE
division to SSI. Unless the context indicates otherwise, references to
"the Company" and "Egghead" include Egghead and its subsidiaries.
Operating results of Eggspert and Egghead International are included in
discontinued operations. See Note 8 of Notes to the Consolidated Financial
Statements.

Egghead's retail stores offer a broad in-store selection of products at
competitive prices, as well as special order capabilities for additional
products. The Company employs a knowledgeable sales force to assist
customers in selecting software, hardware, and related products. At fiscal
year end, the Company was operating 19 of its retail stores under a new
merchandising format which is approximately twice the size of original
stores and is arranged in a more user-friendly format. The performance of
these new stores has been mixed and management continues to evaluate
results while refining the format. While assessing the overall
contribution of the new merchandising format, management intends to open
six new stores. Pending such evaluation and refinement of the new format,
the Company does not intend to open more than the six new stores.

<PAGE>

In August 1995, Egghead formed ELEKOM, a new subsidiary. ELEKOM was
formed to develop electronic commerce applications and services which link
customers and their suppliers. EleTrade, a product being developed by
ELEKOM, uses Lotus Notes and other notes networks to provide large
organizations an easy-to-use, cost-effective, secure and reliable product
ordering and order management system for non-production goods and services.
EleTrade allows companies to create customized electronic catalogs with
multi-media product information and customer-specific pricing. ELEKOM is
also developing additional enhancements which will automate the internal
requisition and approval process and which may create better
asset/inventory management and allow electronic software distribution.
ELEKOM, a development stage company, incurred selling, general and
administrative costs of approximately $1.1 million in fiscal 1996 and is
not expected to make significant sales or distribution of products in
fiscal year 1997.

MARKET OVERVIEW

The software industry is undergoing a noticeable degree of consolidation as
large software publishers acquire either other software publishers or
complete software product lines. Smaller software publishers are attempting
to concentrate on specialized products in limited markets. Software
resellers are also merging with or acquiring other software resellers.

Both businesses and individual consumers have shown an increasing
preference for integrated software packages which combine word processing,
spreadsheet, presentation, and database software. These integrated
packages are appealing to the consumer for several reasons. The purchase
cost of an integrated software package is lower than the individual
components purchased separately. In addition, integration reduces some of
the complexity and learning time involved in using software. Integrated
software packages also help standardize the computing environment for local
area networks, which are becoming more common in the business world. This
shift toward integration and standardization is viewed by many companies as
a way to significantly reduce the cost of supporting PC applications in
their organizations.

Prices of microprocessor chips continue to fall due to increased
competition among computer chip manufacturers, and the introduction of
newer, faster microprocessor chips. The decrease in microprocessor chip
prices has forced PC prices down, resulting in increased sales of PCs to
businesses and individual consumers. Sales of home computers, especially
those equipped for multimedia, have increased dramatically as consumers
begin to use PCs for a variety of uses such as telecommuting, home
productivity, entertainment, communications, and education.

Price performance improvements in microcomputer hardware and the
availability of CD-ROM technology have a dramatic impact on the retail
segment of the market. Sales of PC hardware accessories, such as hard
drives and modems, have increased as consumers enhance their PCs.
Multimedia capability has enabled home users to more effectively use
microcomputers for educational and entertainment purposes.

Access to electronic communication networks, such as the Internet and
commercially available on-line services, has become increasingly important
to both businesses and individual consumers. These electronic
communication networks have grown at a tremendous pace over the last year.
The networks are expected to provide substantial opportunities both now and
in the future for communications, commerce, and the exchange of data.
Software publishers have recognized the significance of this trend, and
have begun to integrate interfaces for these electronic communications
networks into their operating systems and workgroup software.

PRODUCTS AND SERVICES

Egghead resells PC software, hardware and related products, computer-
related magazines and books, tutorials, and selected peripheral devices and
accessories. Egghead has approximately 2,000 software products (including
both IBM-Registered Trademark--compatible and Apple-Registered Trademark-
Macintosh-Registered Trademark- software) and other products in its retail
stores, and thousands more available through 1-800-EGGHEAD's special order
service.

The Company offers a broad array of customer support services to assist
customers in the selection and administration of their software purchases,
including the following:

CUSTOM UPDATES AND EGGSTRAS (CUE-SM-) PROGRAM - a preferred customer
membership program providing discounts and other benefits in the
retail stores and direct response. CUE-SM- also provides the Company
with a valuable database of customers, their PC equipment profiles,
and a history of their software purchases.

COMPUTER SELECT - a CD-ROM-based system updated monthly with
information on most software and hardware products. Articles can be
obtained from all major personal computer publications and sent to
customers as requested.

INTERNET SITE - Egghead now maintains a site on the internet for
information, customer support, and product sales. Egghead's page can
be found at http://www.egghead.com. The site allows Egghead to reach
customers through a new medium as an expanding consumer base purchases
hardware and/or software that allows Internet access. The site uses
the new merchandising format to display SKUs in a manner similar to
the new format Egghead retail stores. Egghead plans to begin offering
electronic delivery of software in the second quarter of 1997.

1-800-EGGHEAD - Egghead maintains a direct response unit which
processes all telephone and mail orders. These orders are solicited
through catalog distribution. Catalogs have been redesigned to use
the merchandising format found in Egghead's new retail stores. 1-800-
EGGHEAD also provides customer service for the 164 stores, as well as
store referral to callers who would like to try a product. 1-800-
EGGHEAD also allows customers access to products not available through
retail outlets by offering a special order service.

MARKETING, ADVERTISING, AND PROMOTION

Egghead's marketing philosophy is to position itself as the reseller of
choice by providing the customer with the best value in terms of
competitive prices, selection, service, and convenience. In addition,
Egghead strives to create primary demand for the products it sells. The
Company's strategy to meet these objectives is to use aggressive
advertising and marketing efforts.

The Company's advertising campaign emphasizes a broad selection of
available merchandise and competitive prices. Advertising is also used to
promote major new product launches.

<PAGE>

Egghead's primary advertising medium is direct mail, which is used to
target the highly identifiable segment of the population which owns and/or
uses computers. In addition to a database of more than 3 million of its
CUE customers, Egghead sends regular direct mail product promotions to
purchased lists of computer owners. The Company also uses both local and
national newspapers. Catalogs are designed to reflect the same layout as
customers will find in Egghead's new format retail stores. These catalogs
are updated and distributed throughout the year.

Egghead has entered into cooperative advertising and other promotional and
market development fund agreements with numerous manufacturers and
distributors. The funds obtained through these agreements assist the
Company in achieving high visibility in the marketplace.

CUSTOMERS

Egghead has a diverse customer base comprised primarily of individuals and
small businesses and uses specific marketing strategies to target different
customer segments.

RETAIL OPERATIONS

Egghead's retail stores are designed to provide a pleasant shopping
environment for walk-in customers, primarily individuals, who purchase PC
software and hardware products for their personal use and/or for use in a
small business. A knowledgeable sales force offers solutions-oriented
assistance to customers selecting software, hardware, and related products.

Egghead's retail stores offer customers competitive prices, a wide
selection of products, excellent service, and convenient store locations.
In addition to stocking approximately 2,000 SKUs in the retail stores,
Egghead customers have access to thousands more through 1-800-EGGHEAD's
special order service. The Company also stocks selected PC hardware
products, computer-related magazines and books, tutorials, and selected
peripheral devices and accessories. Egghead also provides installation
services in most of its stores.

During fiscal 1996, the Company introduced 19 stores based on a new
merchandising format which is approximately twice the size of older format
stores and is arranged in a more user-friendly environment. The
performance of these new stores has been mixed and management continues to
evaluate results while refining the format. While assessing the overall
contribution of the new merchandising format, management intends to open
six new stores. Pending such evaluation and refinement of the new format,
the Company does not intend to open more than the six new stores. The
balance of the Egghead stores contain approximately 2,500 square feet of
retail selling space. Most stores are located in strip shopping centers.
Store locations are researched and chosen to be in areas with high
distribution of personal computers, high population density, and high mean
income levels. Egghead provides in-store demonstration of software, with
most stores having personal computers available for use by customers in
evaluating software in the stores.

MERCHANDISING

Egghead purchases most of its products through a central merchandise buying
department. Inventory levels and product mix are based upon rates of sale,
seasonality, and store demographics and size. The Company also special
orders non-inventoried software products to satisfy customers' special
needs.

<PAGE>

Egghead's decision to buy merchandise directly from manufacturers or
through distributors is determined on a transaction-by-transaction basis
depending on cost, availability, and potential product obsolescence. For
certain products, Egghead has sufficient sales volume to purchase directly
from manufacturers at volume discounts. The Company purchases software and
other products directly from more than 250 manufacturers. Egghead
minimizes the administrative overhead associated with buying products from
hundreds of smaller manufacturers by using a limited number of
distributors.

Egghead conducts business with major vendors including Microsoft and
Western Digital. In fiscal years 1996 and 1995, sales derived from
software programs supplied by Microsoft, Egghead's largest vendor,
represented approximately 18% and 15% of total net sales, respectively.

Egghead has certain exchange and return privileges with many of its
vendors, which typically include time, volume, and other limitations.
These exchange and return privileges allow the Company to reduce the risk
of loss resulting from obsolete and defective merchandise.

SUPPLY AND DEMAND FOR COMPUTER SOFTWARE, HARDWARE AND RELATED SUPPLIES

Sales by Egghead and other similar resellers are dependent upon the
continued purchase and expanded use of home and home office personal
computers, as well as the continued development of personal computer
software. A long-term decline in the purchase or use of home or home
office personal computers, or an interruption in the continued development
of personal computer software, would have a material adverse effect on the
Company's results of operations and financial position.

DISTRIBUTION

Most inventory that Egghead purchases is received in one of the Company's
distribution facilities before it is sent to a customer or to a retail
store. Some products are sent directly from vendors or distributors to
stores or customers. The Company's distribution facilities also process
most returned merchandise. The Company leases a 138,000 square foot
facility in Sacramento, California and a 125,000 square foot facility in
Lancaster, Pennsylvania.

The manner in which microcomputer software products are sold and
distributed is changing rapidly. Other methods of distribution, such as
electronic software distribution could have an impact on how the Company
distributes products in the future.

COMPETITION

The business of selling microcomputer software and hardware is intensely
competitive. The Company currently competes with other "direct sales"
organizations, other software retailers, computer and office superstores,
consumer electronic superstores, mass merchandisers, direct response
companies, computer manufacturers, and software publishers that sell
directly to end-users through traditional and electronic methods of
distribution.

Other software retail competitors include mall-based stores such as
Electronics Boutique, Babbages, and Software Etc.

<PAGE>

Computer and office superstores, such as CompUSA, Computer City, Micro
Center, and Office Depot provide significant competition for Egghead's
retail stores in the markets in which they are located. These stores are
very price competitive. Computer superstores typically offer a wide
product selection, while office superstores have a more limited selection.
Large computer superstores, like Computer City, offer on-site installation
of software and hardware upgrades. Some superstores also offer training
and technical services.

Consumer electronic superstores, such as Best Buy, Future Shop, and Circuit
City, are a growing source of competition for the Company's retail stores
in the markets in which they operate.

Mass merchandisers, such as Wal-Mart, Incredible Universe, and Sears, and
warehouse clubs such as SAM's and Price/Costco, generally concentrate on
basic software products and carry relatively few titles.

Direct response businesses, such as MicroWarehouse, Programmers Paradise,
and PC Connection, are another important channel for software sales.
MicroWarehouse sells their products internationally, and has experienced
significant growth in international markets.

Many superstores and computer manufacturers sell PCs to consumers with
custom-installed hardware and pre-loaded software. This bundling of
products is very convenient for the consumer, and eliminates many of the
technical difficulties involved with the installation of software or
hardware.

Software publishers continue to directly market and sell to end-users. It
is also becoming more common for software publishers to distribute software
over electronic communications networks. Such networks provide the
convenience of allowing the customer to purchase software products directly
from their home or office. However, distribution directly by a publisher
does not provide the customer with a broad selection, personal assistance
from the sales force, or a full demonstration of the product prior to
purchase. There has also been a continuing trend of software publishers
offering new software products at deeply discounted introductory prices.

Because the microcomputer software market is very competitive, software
resellers typically have low gross margins and operating income as a
percentage of sales. Therefore, the Company's profitability is highly
dependent upon effective internal operating and cost control and the
ability to adapt quickly and efficiently to changes in industry trends.

EMPLOYEES

At March 30, 1996, Egghead had approximately 2,300 employees, (including
temporary employees) consisting of approximately 1,800 retail personnel
(including direct response), 200 distribution center employees, and 300
headquarters personnel. Employees are not represented by a collective
bargaining unit.

<PAGE>

TRADEMARKS AND TRADENAMES

"EGGHEAD-Registered Trademark-", "EGGHEAD DISCOUNT SOFTWARE-Registered
Trademark-", "EGG CARTON-Registered Trademark-", "EGGSPERT-Registered
Trademark-", the "PROFESSOR EGGHEAD-Registered Trademark-" design, and
"EGGCESSORIES-Registered Trademark-", are registered in the United States
Patent and Trademark Office as service marks or trademarks of the Company.
The Company also does business under the trade names "Egghead Software",
"Egghead Discount Software", and "Mac's Place at Egghead." In addition,
the Company is the owner of a number of common law trademarks and service
marks, including "SOFTWARE ASSET MANAGEMENT-SM-", "SAM-SM-", "CUE-SM-",
"EGGHEAD-Registered Trademark- EXPRESS-TM-", "ELEKOM-TM-", "EleTrade-TM-",
and certain "EGG" combination words, "MAC'S PLACE-SM-," and "MAC'S PLACE AT
EGGHEAD-SM-." The Company believes the strength of its trademarks and
service marks benefits its business and intends to continue to protect and
promote its registered and common law trademarks and service marks.

ENVIRONMENTAL LAWS

Compliance with federal, state, and local laws enacted for protection of
the environment has had no material effect upon Egghead's capital
expenditures, earnings, or competitive position. The Company does not
anticipate any material adverse effects in the future based on the nature
of its operations and the current focus of such laws.

<PAGE>

PART II. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

Egghead, Inc. (Egghead or the Company), a reseller of personal computer
(PC) software, hardware, and related products, serves small businesses and
individuals through retail outlets and mail order. Egghead's retail stores
offer a broad in-store selection of products at competitive prices, as well
as special order capabilities for additional products. On March 30, 1996,
the Company operated 164 stores located throughout the United States. The
Company employs a knowledgeable sales force to assist customers in
selecting software, hardware, and related products. At the end of fiscal
1996 the Company was operating 19 of its retail stores under a new
merchandising format which is approximately twice the size of predecessor
stores and is arranged in a more user-friendly format. The performance of
these new stores has been mixed and management continues to evaluate
results while refining the format. While assessing the overall
contribution of the new merchandising format, management intends to open
six new stores. Pending such evaluation and refinement of the new format,
the Company does not intend to open more than six new stores.

Egghead continues to implement changes to restructure the Company. The
Company has historically served corporate, governmental and educational
customers through its corporate, government and education sales (CGE)
division. On March 25, 1996, the Company announced the sale of the CGE
division to Software Spectrum, Inc. (SSI), a Texas corporation, for $45.0
million in cash which did not include CGE division's receivables and
inventory that Egghead is liquidating in an orderly manner, all of which
are expected to result in total gross cash proceeds of approximately $90.0
million. The sale, which was effective May 13, 1996, included a
Fulfillment Agreement relating to the provision by Egghead to SSI of
certain support services for a period not to exceed 120 days and a Call
Center Lease detailing the lease for a period of three years of a portion
of Egghead's Spokane facility to SSI. Information contained in this filing
excludes, unless otherwise stated, any data relative to the discontinued
operations of the CGE division. The sales and gross margin performance of
the Company's CGE division had declined and selling, general and
administrative expenses as a percentage of sales had increased in the
months prior to the sale. The sale of the CGE division will allow
management to focus on the Company's retail business. See "--Results of
Operations--DISCONTINUED OPERATIONS."

In August 1995, Egghead formed Elekom Corporation (ELEKOM), a new
subsidiary. ELEKOM was formed to develop electronic commerce applications
and services which link customers and their suppliers. EleTrade, a product
being developed by ELEKOM, uses Lotus Notes and other notes networks to
give large organizations an easy-to-use, cost-effective, secure and
reliable product ordering and order management system for non-production
goods and services. EleTrade allows companies to create customized
electronic catalogs with multi-media product information and customer-
specific pricing. ELEKOM is also developing additional enhancements which
will automate the internal requisition and approval process and which may
create better asset/inventory management and allow electronic software
distribution. ELEKOM, a development stage company, incurred selling,
general and administrative costs of approximately $1.1 million in fiscal
1996 and is not expected to have significant sales or distribute products
in fiscal year 1997.

<PAGE>

Over the past twelve months, Egghead consolidated into a new corporate
headquarters location in Spokane, Washington its direct response
operations, formerly in Kalispell, Montana, and its administrative
operations, previously located in Issaquah, Washington. The relocation,
severance and related costs of approximately $4.6 million are included in
the fiscal 1996 operating results. The Company implemented these changes
to improve customer service and reduce future operating costs.

The Company uses a 52/53 week fiscal year, ending on the Saturday nearest
March 31 of each year. Fiscal years 1996, 1995, and 1994 each had 52
weeks. All references herein to fiscal 1996, 1995, and 1994 relate to the
fiscal years ended March 30, 1996, April 1, 1995, and April 2, 1994
respectively.

CERTAIN RISK FACTORS

In addition to other information contained in this filing, the following
factors could affect the Company's actual results and could cause such
results to differ materially from those achieved in the past or expressed
in the Company's forward-looking statements. When used in this filing, the
words "expects," "believes," "anticipates," and similar expressions are
intended to identify forward-looking statements.

Competition - The personal computer software, hardware and other related
products retailing industry is highly competitive. Egghead competes with
other software specialty stores located in malls and in other locations, as
well as with computer and office superstores, consumer electronic
superstores, mass merchandisers, direct response businesses and software
publishers. In addition, there can be no assurance that other methods of
distribution will not emerge in the future which would result in increased
competition for Egghead. Increased competition may lead to reduced profit
margins on personal computer software, hardware and related products, which
could have an adverse effect on Egghead's results of operations. Certain
of Egghead's competitors have substantially greater financial and other
resources than Egghead, which may give them certain competitive advantages.
See "Business - Competition."

Seasonality and Quarterly Fluctuations - As is the case with many
retailers, a significant portion of Egghead's sales will be generated in
the fiscal quarter which includes the Christmas selling season. As a
result, the annual earnings of Egghead will be heavily dependent on the
results of that quarter. Egghead's quarterly results of operations may
also fluctuate as a result of the amount of sales contributed by new
stores, the timing of costs associated with the construction and opening of
these stores, the timing of the closing of any stores, the timing of
product releases and a variety of other factors.

Dependence on Suppliers - Egghead expects to purchase a significant number
of its products from Microsoft and Western Digital. During fiscal 1996 and
1995, sales derived from products supplied by Microsoft and Western Digital
accounted for 23.7% and 22.9%, respectively, of Egghead's total net sales.
The Company believes the loss of Microsoft or Western Digital as a supplier
could have a material adverse effect on Egghead's business and financial
results. In addition, Egghead's financial performance is in a large part
dependent on the terms it obtains from its suppliers. Such terms include
unit prices, unsold product return policies, advertising and market
development allowances, freight charges and payment terms. If Egghead is
unable to maintain favorable terms with its suppliers, its results of
operations could be materially adversely affected. See "Business -
Merchandising."

<PAGE>

New Merchandising Store Format - Egghead's ability to open and operate new
stores profitably will depend upon the success of the recently opened new
merchandising format stores, the availability of suitable store locations,
the negotiation of acceptable lease terms, its financial resources and its
ability to control the operational aspects of its growth. While assessing
the overall contribution of the new merchandising format, management
intends to open six new stores. Pending such evaluation and refinement of
the new format, the Company does not intend to open more than the six new
stores. See "Business - Retail Operations."

Dependence on Purchase and Use of Personal Computers and Software - Sales
by Egghead of personal computer software, hardware and related products
will be dependent upon the continued purchase and expanded use of home and
home office personal computers, as well as the continued development of
personal computer software. A long-term decline in the purchase or use of
home or home office personal computers, or an interruption in the continued
development of personal computer software, would have a material adverse
effect on the Company's results of operations and financial position.

Dependence on Key Personnel - The success of Egghead will also be dependent
upon its ability to attract, motivate and retain key management personnel
involved in store operations, merchandising, marketing and administration.
The loss of services of key personnel could have a material adverse effect
on Egghead's business and financial results.

Development Stage Subsidiary - In August 1995, the Company formed ELEKOM,
a subsidiary, which is developing electronic commerce applications and
services which link customers and their suppliers. Selling, general and
administrative costs of approximately $1.1 million and $407,000 were
incurred by ELEKOM in fiscal 1996 and 1995, respectively. ELEKOM is
expected to continue to incur costs in development of these products and is
not expected to make significant sales or distribution of products in
fiscal 1997. There can be no assurance that ELEKOM will complete
development of these products, or if completed, that the products will have
a market or that another similar product will not be already be introduced
by a competitor. See "Business - General

Readers are cautioned not to place undue reliance on the Company's forward-
looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
such forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

<PAGE>

RESULTS OF OPERATIONS

OVERVIEW

Egghead reported a total net loss for continuing and discontinued
operations of $10.7 million for fiscal 1996 compared to net income of $2.7
million and a net loss of $514,000 for fiscal years 1995 and 1994,
respectively. The net loss during fiscal 1996 was due primarily to a
decrease in sales due to a reduction in the average number of stores in
full operation during the year, one-time costs of approximately $4.6
million associated with the relocation of the corporate headquarters, costs
of rolling out the new format retail stores, and investments of
approximately $1.1 million in ELEKOM. Fiscal year 1995 net income included
a one-time theft insurance recovery of $1.65 million, pre-tax, related to
inventory stolen from retail stores in prior years. Earnings (loss) per
share for the fiscal years 1996, 1995, and 1994 was $(0.62), $0.15, and
$(0.03), respectively.

CONTINUING OPERATIONS

Income (loss) from continuing operations includes the results of the
Company's retail division, direct response divisions, and ELEKOM as well as
selling, general, and administrative expenses related to these operations.
The following table shows the relationship of certain items relating to
continuing operations included in the Company's Consolidated Statements of
Operations expressed as a percentage of net sales:

1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>

Net sales 100.0% 100.0% 100.0%
Cost of sales, including certain buying,
occupancy and distribution costs 88.5 87.7 86.3
-------- -------- --------
Gross margin 11.5 12.3 13.7

Selling, general, and administrative expense 14.8 12.4 15.0
Depreciation and amortization expense, net
of amounts included in cost of sales 1.8 1.7 2.0
Provision for shareholder litigation - - 0.3
-------- -------- --------

Operating income (loss) (5.1) (1.8) (3.6)

Theft insurance recovery - 0.4 -
Other income/(expense), net 0.6 0.1 -
-------- -------- --------

Loss before income taxes (4.5) (1.3) (3.6)
Income tax benefit 1.7 0.5 1.4
-------- -------- --------

Loss from continuing operations (2.8)% (0.8)% (2.2)%
-------- -------- --------
-------- -------- --------

</TABLE>

<PAGE>

NET SALES in fiscal 1996 were $403.8 million, a decrease of $30.2 million
or 7% from fiscal 1995 net sales of $434.0 million. Fiscal 1995 sales
increased $60.5 million or 16% from fiscal 1994 sales of $373.5 million.
Fiscal 1996 sales decreases were affected by a reduction in the average
number of stores in full operation, which was 166 during fiscal 1996,
compared to 178 stores during the previous year. Comparable retail store
sales increased 0.1% in fiscal 1996 compared to fiscal 1995. Comparable
store sales for the third and fourth quarters of fiscal 1996 decreased 6.6%
and 12.5%, respectively, as compared to the fiscal 1995 third and fourth
quarters. Comparable store sales performance in the fiscal 1997 months of
April and May have continued this trend with decreases of 7.4% and 6.1%
over the same periods in fiscal 1996. In fiscal 1995, comparable retail
store sales increased 21% compared to fiscal 1994. Comparable store sales
measure sales for stores which were open in both periods being evaluated.
Because new format stores were opened during fiscal 1996, their sales will
not impact comparable store sales statistics until they have been active
during all periods evaluated.

During fiscal 1996, the Company opened 10 stores, remodeled 10 stores, and
closed 15 stores, operating a total of 164 stores at March 30, 1996. This
compares to the 169 stores open at fiscal year end 1995 and 189 stores open
at fiscal year end 1994. At the end of fiscal 1996, the Company was
operating 19 of its retail stores under a new merchandising format which is
approximately twice the size of older format stores and is arranged in a
more user-friendly format. The performance of these new stores has been
mixed and management continues to evaluate results while refining the
format. While assessing the overall contribution of the new merchandising
format, management intends to open six new stores. Pending such evaluation
and refinement of the new format, the Company does not intend to open more
than the six new stores.

GROSS MARGIN (net sales minus cost of sales, including certain buying,
occupancy, and distribution costs) as a percentage of net sales was 11.5%
in fiscal 1996, compared to 12.3% and 13.7% in fiscal years 1995 and 1994,
respectively. During 1996, gross margins were negatively affected by the
Company's promotion of Microsoft Windows 95 and a clearance sale during the
last quarter of the fiscal year. Gross margin as a percentage of sales
continues to be affected by industry-wide pricing pressure related to both
competitors' pricing and vendors' pricing.

SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSE as a percentage of net
sales was 14.8% in fiscal 1996, compared to 12.4%, and 15.0% in fiscal
years 1995 and 1994, respectively. The increased expenses in fiscal 1996
include $4.6 million incurred in connection with the relocation of the
corporate offices to Spokane and $1.1 million related to development of
products by ELEKOM. SG&A expense as a percentage of net sales not
including relocation expense or ELEKOM would be 13.3% in fiscal 1996 and
12.3% in fiscal 1995. The improvement in the fiscal 1995 SG&A expense as a
percentage of sales compared to fiscal 1994 was due mainly to sales
increasing at a faster rate than expenses.

DEPRECIATION AND AMORTIZATION EXPENSE, NET OF AMOUNTS INCLUDED IN COST OF
SALES, of $7.4 million in fiscal 1996, compared to $7.4 million and $7.6
million in fiscal years 1995 and 1994, respectively has remained constant.

PROVISION FOR SHAREHOLDER LITIGATION of $1.2 million in fiscal 1994
represents a charge for the settlement and related attorneys' fees, net of
an insurance recovery, of a shareholders' lawsuit. See note 10 of Notes to
Consolidated Financial Statements.

<PAGE>

THEFT INSURANCE RECOVERY of $1.65 million in fiscal 1995 represents
settlement of an insurance claim, net of expenses, for inventory stolen by
members of a multi-state shoplifting ring from numerous retail stores
during fiscal years 1991, 1992, and 1993.

DISCONTINUED OPERATIONS

Due to the subsequent sale of the CGE division, all results for the
operations of the CGE division are reported as a discontinued operation.
Certain general, administrative and distribution areas have traditionally
supported all of the Company's business lines. The expenses reflected in
the discontinued operations results reflect only those activities directly
related to the CGE business.

NET SALES for the discontinued operations of CGE declined $65.2 million, or
15.2% from $428.5 million to $363.3 million in fiscal 1996. Fiscal 1995
net sales were $23.7 million, or 5.9% greater than net sales of $404.8
million in fiscal 1994.

GROSS MARGIN for CGE (net sales minus cost of sales, including certain
buying, occupancy, and distribution costs) as a percentage of net sales was
10.1% in fiscal 1996, compared to 11.3% and 12.8% in fiscal years 1995 and
1994, respectively

SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSE as a percentage of net
sales was 9.2% in fiscal 1996, compared to 8.6%, and 8.3% in fiscal years
1995 and 1994, respectively.

DEPRECIATION AND AMORTIZATION EXPENSE, NET OF AMOUNTS INCLUDED IN COST OF
SALES, was $2.3 million in fiscal 1996, compared to $2.0 million and $1.1
million in fiscal years 1995 and 1994, respectively.

OPERATING INCOME, as a result of the foregoing factors, was $0.9 million in
fiscal 1996, compared to $7.1 million and $12.8 million in fiscal years
1995 and 1994, respectively

INCOME BEFORE INCOME TAXES, was $0.6 million in fiscal 1996 compared to
$9.8 million and $12.9 million in fiscal years 1995 and 1994, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased $7.0 million from $42.6 million at the
end of fiscal 1995, to $49.6 million at the end of fiscal 1996. The
increase was due principally to a $13.8 million decrease in inventory, a
$14.9 million increase in accounts payable, all of which were partially
offset by $16.2 million of additions to property and equipment. In
addition, the Company had cash losses of $1.2 million in fiscal 1996,
compared to cash income of $14.3 million in fiscal 1995.

Net accounts receivable increased $3.6 million from $20.5 million at April
1, 1995, to $24.1 million at March 30, 1996. The increase is due primarily
to an increase of approximately $2.6 million in amounts due from vendors.

Merchandise inventories decreased $13.8 million, or 11%, from $98.5 million
at the end of fiscal 1995, to $84.7 million at the end of fiscal 1996. The
decrease is consistent with current sales declines and management's efforts
to reduce inventory levels.

<PAGE>

Assets of discontinued operations include all of the current assets of CGE
as of March 30, 1996 and April 1, 1995, respectively. These amounts are
primarily trade accounts receivable. See Note 8 of Notes to the
Consolidated Financial Statements.

Current and non-current deferred income taxes totaling $9.1 million and
$8.4 million at March 30, 1996, and April 1, 1995, respectively, resulted
from taxes paid on temporary differences which caused taxable income to
exceed financial reporting income.

Net property and equipment increased $7.6 million, from $21.9 million at
the end of fiscal 1995, to $29.5 million at March 30, 1996. The increase
is principally due to the addition or remodel of 19 new format stores as
well as improvements to the corporate headquarters building in Spokane.

Accounts payable increased $14.9 million, from $104.4 million at April 1,
1995, to $119.3 million at March 30, 1996. The increase in accounts
payable is primarily attributable to merchandise purchases near the fiscal
year end and outstanding vendor payables to be offset by product returns.

During fiscal 1996, the Company financed its working capital requirements
and capital expenditures with cash provided by operations. Effective
December 8, 1995, the Company entered into a revolving loan agreement with
two banks providing for secured borrowings of up to $35 million through
April 30, 1996. Each bank provided a $17.5 million line of credit and one
bank served as agent for the agreement. The Company could elect interest
rates on the notes based on the participating banks' rates on certificates
of deposit, LIBOR, or prime rate. The agreement contained a number of
covenants, including a restriction on the payment of dividends and
compliance with certain financial ratios. The Company was not in
compliance with the net worth covenant at March 30, 1996. The Company had
no outstanding borrowings under the revolving loan agreement at March 30,
1996. The line was not renewed at expiration and the lien on Company
assets securing borrowings was released.

Capital expenditures in fiscal 1996 totaled approximately $16.2 million.
Capital expenditures included leasehold improvements, fixtures, computer
hardware, software and communications equipment, principally due to the
remodel or addition of 19 new format stores and the relocation of the
corporate headquarters. Capital expenditures in fiscal 1995 totaled
approximately $14.7 million. Capital expenditures included land and a
building in Spokane, Washington for the corporate headquarters. Other
expenditures included computer software and communications equipment.

Cash and cash equivalents at March 30, 1996 were $49.6 million. On May 13,
1996, the Company also received $45.0 million of gross cash proceeds from
the sale of CGE to SSI, which did not include the CGE division's
receivables and inventory that Egghead is liquidating in an orderly manner,
all of which are expected to result in total gross cash proceeds of
approximately $90.0 million. The Company expects these balances will be
adequate to meet future cash requirements for operations.

<PAGE>

NEW ACCOUNTING STANDARDS

In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. This new standard requires long-
lived assets and certain identifiable intangible assets be evaluated to
determine whether the carrying amount is recoverable based on estimated
future cash flows expected from the use of the assets and/or cash to be
received upon disposal of the assets. The Company will adopt this standard
in the first quarter of fiscal year 1997 and anticipates the effect of the
adjustment, primarily from goodwill associated with direct response to be a
charge of approximately $1.3 million before income taxes.

In October 1995, the FASB issued Statement No. 123, Accounting for Stock-
Based Compensation. This new standard requires entities to choose either a
fair valued based method or an intrinsic value based method of accounting
for all employee stock compensation plans. The Company currently uses and
plans to continue to use the intrinsic value based method which requires no
compensation cost to be recognized at the date of the stock compensation
grant if the option is granted at the current market price. The Company
will adopt this new standard during fiscal 1997 at which time additional
footnote disclosure will be required.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Egghead, Inc.:

We have audited the accompanying consolidated balance sheets of Egghead, Inc. (a
Washington corporation) and subsidiaries as of March 30, 1996 and April 1, 1995,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three fiscal years in the period ended March 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Egghead, Inc. and subsidiaries
as of March 30, 1996 and April 1, 1995, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
March 30, 1996, in conformity with generally accepted accounting principles.

Arthur Andersen LLP

Seattle, Washington,
May 29, 1996

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Consolidated Balance Sheets
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ASSETS
March 30, April 1,
1996 1995
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49,590 $ 42,592
Non-trade accounts receivables, net of allowance for
doubtful accounts of $2,098 and $2,169, respectively 24,079 20,494
Merchandise inventories, net 84,712 98,543
Prepaid expenses and other current assets 9,455 4,045
Current deferred income taxes (Note 4) 4,859 5,300
Discontinued operations - net current assets (Note 8) 71,796 70,059
---------- ----------
Total current assets 244,491 241,033
---------- ----------

Property and equipment, net (Note 2) 29,495 21,925
Non-current deferred income taxes (Note 4) 4,221 3,051
Other assets 1,621 2,172
Discontinued operations - net long-term assets (Note 8) 1,727 1,960
---------- ----------

$ 281,555 $ 270,141
---------- ----------
---------- ----------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Notes payable to banks (Note 3) $ - $ -
Accounts payable 119,341 104,425
Accrued liabilities 15,817 16,395
Income taxes payable (Note 4) - 325
Current portion of capital lease obligations 295 252
Discontinued operations - current liabilities (Note 8) 5,650 908
---------- ----------
Total current liabilities 141,103 122,305
---------- ----------

Capital lease obligations, less current portion (Note 7) 280 106
Deferred rent 903 1,314
---------- ----------

Total liabilities 142,286 123,725
---------- ----------

Commitments and contingencies (Note 7) - -

Shareholders' equity (Note 5):
Common stock, $.01 par value:
50,000,000 shares authorized; 17,546,548 and
17,166,031 shares issued and outstanding, respectively 176 172
Additional paid-in capital 124,104 120,572
Retained earnings 14,989 25,672
---------- ----------
Total shareholders' equity 139,269 146,416
---------- ----------

$281,555 $270,141
---------- ----------
---------- ----------

</TABLE>

SEE NOTES TO CONSODOLIDATED FINANCIAL STATEMENTS.

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Consolidated Statements of Operations
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales $403,841 $434,021 $373,510

Cost of sales, including certain buying, occupancy
and distribution costs 357,373 380,428 322,210
-------- -------- --------

Gross margin 46,468 53,593 51,300

Selling, general and administrative expense 59,639 53,895 56,096

Depreciation and amortization expense, net of
amounts included in cost of sales 7,449 7,363 7,603

Provision for shareholder litigation (Note 10) - - 1,200
-------- -------- --------

Operating loss (20,620) (7,665) (13,599)

Theft insurance recovery (Note 9) - 1,650 -

Other (expense) income:
Interest expense (77) (39) (82)
Interest income 2,232 761 352
Other, net 314 (104) (371)
-------- -------- --------

Loss from continuing operations
before income taxes (18,151) (5,397) (13,700)

Income tax benefit (Note 4) 7,030 2,106 5,343
-------- -------- --------
Net loss from continuing operations (11,121) (3,291) (8,357)
Income from discontinued
operations, net of tax (Note 8) 376 5,959 7,843
-------- -------- --------

Net income (loss) $(10,745) $ 2,668 $ (514)
-------- -------- --------
-------- -------- --------

Earnings (loss) per share:
Continuing operations $ (0.64) $ (0.19) $ (0.49)
Discontinued operations 0.02 0.34 0.46
-------- -------- --------

Earnings (loss) per share $ (0.62) $ 0.15 $ (0.03)
-------- -------- --------
-------- -------- --------

Weighted average common shares outstanding 17,437 17,281 17,088
-------- -------- --------
-------- -------- --------

</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Consolidated Statements of Shareholders' Equity
(AMOUNTS IN THOUSANDS)

Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, April 3, 1993 16,983 $ 170 $ 119,242 $ 23,578 $ 142,990

Stock issued for cash, pursuant
to employee stock purchase plan 70 1 487 - 488
Tax benefit related to stock options - - 6 - 6
Stock granted as compensation 68 - 552 - 552
Translation adjustment - - - (106) (106)
Net loss - - - (514) (514)
--------- --------- --------- --------- ---------
Balance, April 2, 1994 17,121 171 120,287 22,958 143,416

Stock issued for cash, pursuant
to employee stock purchase plan 42 1 258 - 259
Stock issued for cash, pursuant
to stock option plan 3 - 27 - 27
Translation adjustment - - - 46 46
Net income - - - 2,668 2,668
--------- --------- --------- --------- ---------
Balance, April 1, 1995 17,166 172 120,572 25,672 146,416

Stock issued for cash, pursuant
to employee stock purchase plan 46 1 286 - 287
Stock issued for cash, pursuant
to stock option plan 335 3 3,246 - 3,249
Translation adjustment - - - 62 62
Net loss - - - (10,745) (10,745)
--------- --------- --------- --------- ---------

Balance, March 30, 1996 17,547 $ 176 $ 124,104 $ 14,989 $ 139,269
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Consolidated Statements of Cash Flows
(DOLLARS IN THOUSANDS)

1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss from operations $(10,745) $ 2,668 $ (514)
-------- -------- --------

Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 10,721 10,468 10,250
Deferred rent (411) (108) (85)
Deferred income taxes (729) 1,084 (1,322)
Stock issued as compensation - - 552
(Gain) loss on disposition of property
and equipment (55) 187 327
Changes in assets and liabilities:
Account receivable, net (3,585) 1,089 (7,935)
Merchandise inventories 13,831 13,558 19,948
Prepaid expenses & other current assets (5,410) (574) 15
Other assets 128 (245) (2,288)
Discontinued operations, net 3,005 (6,881) (4,233)
Accounts payable 14,916 13,401 (7,040)
Accrued liabilities (578) (2,359) 1,307
Income taxes payable (325) (169) (295)
-------- -------- --------

Total adjustments 31,508 29,451 9,201
-------- -------- --------

Net cash provided by operating activities 20,763 32,119 8,687
-------- -------- --------

Cash flows from investing activities:
Additions to property and equipment (16,174) (14,741) (9,483)
Proceeds from sale of equipment 86 103 117
Discontinued operations, net (788) (520) -
-------- -------- --------

Net cash used by investing activities (16,876) (15,158) (9,366)
-------- -------- --------

Cash flows from financing activities:
Proceeds from stock issuances 3,536 286 488
Payments made on capital lease obligations (487) (308) (493)
-------- -------- --------

Net cash provided (used) by
financing activities 3,049 (22) (5)
-------- -------- --------

Effect of exchange rates on cash 62 (24) (25)
-------- -------- --------

Net increase (decrease) in cash and cash
equivalents 6,998 16,915 (709)
Cash and cash equivalents at beginning of period 42,592 25,677 26,386
-------- -------- --------

Cash and cash equivalents at end of period $ 49,590 $ 42,592 $ 25,677
-------- -------- --------
-------- -------- --------

</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Consolidated Statements of Cash Flows (CONTINUED)

1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>

SUPPLEMENTAL DISCLOSURES OF CASH PAID
DURING THE YEAR (IN THOUSANDS):

Interest $ 77 $ 39 $ 76
Income taxes $ 334 $ 668 $ 1,314

</TABLE>

SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:

Capital lease obligations totaling $0.7 million and $0.2 million were recorded
in fiscal years 1996 and 1995 respectively, when the Company acquired new
equipment.

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

All references herein to fiscal 1996, 1995 and 1994 relate to the fiscal years
ended March 30, 1996, April 1, 1995, and April 2, 1994, respectively.

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS
Egghead, Inc. sells personal computer software, hardware and related
products through its wholly-owned subsidiaries, DJ&J Software Corporation
(DJ&J, d/b/a Egghead Software) and Eggspert Software, Ltd. (Eggspert, a
Canadian subsidiary), EH Direct, Inc. (EH Direct), Egghead International,
Inc. (Egghead International), and Elekom Corporation (Elekom). References
to "the Company" and "Egghead" include Egghead, Inc., its predecessors, and
its subsidiaries. Eggspert and Egghead International became inactive
subsidiaries May 13, 1996 following the sale of corporate, government, and
education (CGE) division to Software Spectrum, Inc. (SSI) SEE NOTE 8.

CONSOLIDATION
The consolidated financial statements include the accounts of Egghead, Inc.
and its wholly-owned subsidiaries, DJ&J, Eggspert, EH Direct, Egghead
International, and ELEKOM, and include all such adjustments and
reclassifications necessary to eliminate the effect of significant
intercompany accounts and transactions. Operating results for Eggspert and
Egghead International are included in discontinued operations. SEE NOTE
8.

ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.

CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. The
carrying amount of cash equivalents approximates fair value because of the
short-term maturity of those instruments.

ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION
Company sales made on credit generally have terms of net 30 days. The
sales and corresponding trade receivables for inventoried product are
recorded upon merchandise shipment. The Company records provisions for
doubtful accounts and sales returns and allowances based upon historical
experience.

Certain advertising and promotional expenditures are reimbursable from
suppliers under cooperative advertising and other promotional and market
development fund arrangements. Amounts qualifying for reimbursement are
recorded as receivables from the suppliers and as a corresponding reduction
of net advertising expense in the period the expenditure occurs. Also
included in accounts receivable are credit card receivables and amounts due
from vendors for returned inventory and other programs. The Company
records a provision for uncollectible vendor receivables based upon
historical experience.

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Notes to Consolidated Financial Statements (CONTINUED)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

MERCHANDISE INVENTORIES
Merchandise inventories are accounted for using the moving weighted average
cost method and are stated at the lower of cost or market. Egghead
maintains reserves for the obsolescence of merchandise inventory. These
reserves totaled approximately $6.7 million and $8.0 million at March 30,
1996 and April 1, 1995 respectively. Management has developed a plan to
dispose of this obsolete inventory and believes the reserve is adequate to
cover any losses on disposition. Inventories on the balance sheet are
shown net of this reserve.

PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation of equipment, furniture, and fixtures is provided using the
straight-line method over their estimated useful lives ranging from two to
seven years. Depreciation of buildings is provided using the straight-line
method over their estimated useful lives ranging from 20 to 30 years.
Amortization of leasehold improvements is provided using the straight-line
method over the lesser of the lease term or the assets' estimated useful
lives.

GOODWILL
Net assets of organizations acquired in purchase transactions are recorded
at fair value at date of acquisitions. Unidentified intangibles are
amortized straight line over the estimated life of the remaining long-term
assets acquired. Unidentified intangibles at March 30, 1996 and April 1,
1995 were $998,000 and $1.4 million, respectively, net of accumulated
amortization of $993,000 and $595,000, respectively.

ACCOUNTS PAYABLE
Outstanding checks included in accounts payable were $9.0 million and
$10.4 million at March 30, 1996 and April 1, 1995, respectively.

DEFERRED RENT
Certain store lease agreements provide for scheduled rent increases or for
rent payments to commence at a date later than the date of occupancy. In
these cases, the Company recognizes the aggregate rent expense on a
straight-line basis over the lease term beginning when the store opens.

INCOME TAXES
The Company determines its income tax accounts in accordance with Statement
of Financial Accounting Standards No. 109. Deferred income taxes result
primarily from temporary differences in the recognition of certain items
for income tax and financial reporting purposes.

EARNINGS (LOSS) PER SHARE
Earnings per share amounts are computed using the weighted average number
of common shares and dilutive common equivalent shares outstanding during
each period using the treasury stock method. Common equivalent shares
result from the assumed exercise of stock options and from the conversion
of cash related to the employee stock purchase plan into common shares
based upon the terms of the plan which would have a dilutive effect in
years where there are earnings. Common equivalent shares had no material
effect on the computation in fiscal years 1996, 1995, or 1994.

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Notes to Consolidated Financial Statements (CONTINUED)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of the Company's foreign operations are translated
into U.S. dollars at the exchange rate on the balance sheet date. Results
of operations are translated at the average exchange rate prevailing during
the fiscal year. The results of unrealized exchange rate fluctuations on
translating foreign currency assets and liabilities into U.S. dollars are
recorded as a component of retained earnings. Realized gains and losses
from foreign currency transactions are included in net income.

OTHER ACCOUNTING PRINCIPLES
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. This new standard requires long-
lived assets and certain identifiable intangible assets be evaluated to
determine whether the carrying amount is recoverable based on estimated
future cash flows expected from the use of the assets and cash to be
received upon disposal of the assets. The Company will adopt this standard
in the first quarter of fiscal year 1997 and anticipates the effect of the
adjustment, primarily from goodwill associated with direct response, to be
a charge of approximately $1.3 million before income taxes.

FISCAL YEARS
The Company uses a 52/53 week fiscal year, ending on the Saturday nearest
March 31 of each year. Fiscal quarters are such that the first three
quarters consist of 13 weeks and the fourth quarter consists of the
remaining 13/14 weeks. Fiscal years 1996, 1995 and 1994 each had 52
weeks.

<PAGE>

PART II. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

EGGHEAD, INC. AND SUBSIDIARIES

- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)

NOTE 2 PROPERTY AND EQUIPMENT

The components of property and equipment at March 30, 1996 and April 1,
1995 were as follows (in thousands):

March 30, April 1,
1996 1995
--------- ---------
Land and buildings $ 8,547 $ 6,574
Equipment 38,814 33,559
Leasehold improvements 14,157 8,652
Furniture and fixtures 7,080 6,674
--------- ---------
68,598 55,459
Less accumulated depreciation and
amortization (39,103) (33,534)
--------- ---------

Property and equipment, net $ 29,495 $ 21,925
--------- ---------
--------- ---------

NOTE 3 NOTES PAYABLE TO BANKS

Effective December 8, 1995, the Company entered into a revolving loan
agreement with two banks providing for secured borrowings of up to $35
million through April 30, 1996. Each bank provided a $17.5 million line of
credit and one bank served as agent for the agreement. The Company could
elect interest rates on the notes based on the participating banks' rates
on certificates of deposit, LIBOR, or prime rate. The agreement contained
a number of covenants, including a restriction on the payment of dividends
and compliance with certain financial ratios. The Company was not in
compliance with net worth ratios as of March 30, 1996. The Company had no
outstanding borrowings under the revolving loan agreement at March 30,
1996. The line was not renewed at expiration and the lien on Company
assets securing borrowings was released.

A summary of borrowings under the lines of credit follows (in thousands):

Fiscal year
-----------
1996 1995 1994
--------- --------- ---------

Maximum amount outstanding $ 11,275 $ - $ 5,950
Average amount outstanding $ 285 $ - $ 350
Weighted average interest rate 8.0% -% 3.9%

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Notes to Consolidated Financial Statements (CONTINUED)

NOTE 4 INCOME TAXES

The provision (benefit) for income taxes is comprised of the following (in
thousands):

Fiscal year
-----------
1996 1995 1994
--------- --------- ---------

Current:
Federal $ (4,383) $ (2,048) $ (3,545)
State (1,917) (896) (990)
--------- --------- ---------
(6,300) (2,944) (4,535)
--------- --------- ---------

Deferred:
Federal (404) 730 (704)
State (326) 108 (104)
--------- --------- ---------
(730) 838 (808)
--------- --------- ---------

Total $ (7,030) $ (2,106) $ (5,343)
--------- --------- ---------
--------- --------- ---------

Deferred income taxes result primarily from temporary differences in certain
items for income tax and financial reporting purposes. The tax effects of
temporary differences giving rise to the deferred tax assets are as follows:

March 30, April 1,
1996 1995
--------- ---------

Accounts receivable $ 857 $ 868
Merchandise inventories 2,651 2,919
Property and equipment 3,625 2,385
Other assets 256 155
Accrued liabilities 1,442 1,717
Deferred rent 249 307
--------- ---------

Total deferred tax assets $ 9,080 $ 8,351
--------- ---------
--------- ---------

The Company's income tax benefit differs from the amount computed by applying
the statutory federal tax rate to loss from continuing operations before taxes
as follows:

Fiscal year
-----------
1996 1995 1994
--------- --------- ---------

Statutory Federal tax rate (34.0)% (34.0)% (34.0)%
State taxes, net of Federal benefit (4.6) (4.0) (4.4)
Tax exempt interest income (1.8) (3.3) (0.7)
Other, net 1.7 2.3 0.1
--------- --------- ---------
(38.7)% (39.0)% (39.0)%
--------- --------- ---------
--------- --------- ---------

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Notes to Consolidated Financial Statements (CONTINUED)

NOTE 5 STOCK OPTION AND STOCK PURCHASE PLANS

EMPLOYEE STOCK PURCHASE PLAN

The Egghead, Inc. 1989 Employee Stock Purchase Plan currently provides
options to acquire the Common Stock of the Company to substantially all
full-time and certain other employees at the lesser of 85% of the fair
market value of the Common Stock on August 1 of the first and second plan
years and July 1 thereafter, or 85% of the fair market value on the
following July 31 of the first plan year and June 30 of each plan year
thereafter. Under the plan, a maximum of 650,000 shares were reserved for
issuance. As of March 30, 1996, there were approximately 340,000 shares
available for future issuance.

THE 1993 STOCK OPTION PLAN

In September 1993, the Company's shareholders approved the 1993 Stock
Option Plan (the "1993 Plan"), under which 2,000,000 shares of the
Company's Common Stock were reserved for issuance. The 1993 Plan replaced
the 1986 Combined Incentive and Non-Qualified Stock Option Plan (the "1986
Combined Plan") under which 2,000,000 shares were originally reserved for
issuance. The number of shares reserved for issuance under the 1993 Plan
was increased by the shares reserved for issuance under the 1986 Combined
Plan that were not subject to outstanding stock options. Shares presently
subject to outstanding stock options under the 1986 Combined Plan, which
subsequently are canceled or will expire, will increase the number of
shares reserved for issuance under the 1993 Plan. No additional stock
options will be granted under the 1986 Combined Plan.

Options granted, exercised, and canceled under the above Plans are
summarized as follows:

Fiscal year
-----------
1996 1995 1994
--------- --------- ---------

Outstanding, beginning
of year 1,513,089 702,322 1,184,338
Options granted 621,100 1,140,900 250,000
Options exercised (55,395) (2,625) -
Options canceled (705,907) (327,508) (732,016)
--------- --------- ---------
Outstanding, end of year 1,372,887 1,513,089 702,322
--------- --------- ---------

Exercisable, end of year 359,277 293,139 237,497
--------- --------- ---------
--------- --------- ---------
Available for grant in
future years 1,860,873 1,776,066 2,589,458
--------- --------- ---------
--------- --------- ---------

Price of Options:
Granted during year $9.50 - $10.75 $6.19 - $10.25 $7.50 - $8.13
Exercised during year $6.19 - $12.75 $9.88 - $10.75 -
Canceled during year $6.19 - $17.00 $6.19 - $17.00 $8.37 - 17.00

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Notes to Consolidated Financial Statements (CONTINUED)

NOTE 5 STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)

THE NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

In September 1993, the Company's shareholders approved the Non-employee
Director Stock Option Plan, and in August 1995 the Company's shareholders
approved amendments thereto (as amended, the "Director Plan") under which
450,000 shares of the Company's Common Stock were reserved for issuance.
As of March 30, 1996, 315,000 shares were available for grant and 135,000
shares were subject to outstanding options which have been granted at
prices ranging from $7.25 to $13.75. As of March 30, 1996, options for
90,000 shares were vested.

THE EXECUTIVE PLAN

In February 1989, the Board of Directors approved four-year employment
agreements and stock option agreements for three executive officers who are
no longer with the Company, Stuart Sloan, Ronald Weinstein, and Matthew
Griffin, whereby the officers' compensation was based on equity incentives.
Each drew an annual salary of $1 per year during their term of employment.
Options to acquire up to 1,700,000 shares of common stock are authorized
under the Plan. As of March 30, 1996, 325,000 shares were available for
grant and 1,096,324 were subject to outstanding options which have been
granted to the above named executive officers of the Company at prices
ranging from $10.38 to $20.00. All outstanding options are vested and
expire in February 1999. As of March 30, 1996, 278,676 of the options had
been exercised at $10.38 per share.

NOTE 6 401(K) PLAN

The Company has a 401(k) retirement plan for the benefit of its employees.
After six months of full-time employment (more than 1,000 hours), an
employee is eligible to participate in the plan. Employee contributions
are matched by the Company at 50% of each employee's contribution up to 4%
of their compensation. The Company's contributions are fully vested upon
the completion of two years of service. The Company's contributions were
approximately $228,000, $446,000 and $571,000 in fiscal years 1996, 1995,
and 1994, respectively.

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Notes to Consolidated Financial Statements (CONTINUED)

NOTE 7 COMMITMENTS AND CONTINGENCIES

Significant supplier
In fiscal 1996 and 1995, one supplier accounted for sales aggregating
approximately $71.6 million and $61.0 million, respectively. The loss of
this supplier could have a material adverse effect on the Company's
business and financial results and condition.

Leases
The Company leases retail stores and distribution facilities under
operating leases with remaining lives on most leases ranging from one to
five years. Some leases contain renewal options of one to five years which
the Company may exercise at the end of the initial lease term. The leases
generally require the Company to pay taxes, insurance, and certain common
area maintenance costs.

Aggregate rental expense, including common area maintenance charges, for
all operating leases for the fiscal years ended 1996, 1995, and 1994 was
approximately $15,990,829, $16,769,000 and $18,012,000, respectively. As
of March 30, 1996, future minimum rental payments under non-cancelable
operating and capital leases for retail stores and distribution facilities,
and equipment consisted of the following (in thousands):

Capital Operating
Fiscal Year leases leases
----------------------------------------------
1997 330 13,261
1998 306 9,251
1999 - 5,446
2000 - 2,404
2001 1,157
Thereafter - -
------ ------
Total minimum payments 636 $31,519
------
------
Less interest (61)
------
Present value of minimum
lease payments 575
Less current portion (295)
------
Capital lease obligations,
less current portion $280
------
------

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Notes to Consolidated Financial Statements (CONTINUED)

NOTE 8 DISCONTINUED OPERATIONS AND SUBSEQUENT EVENTS

Effective May 13, 1996, the Company sold its CGE division to SSI, a Texas
corporation, for $45 million in cash pursuant to the terms of an asset
purchase agreement entered into on March 23, 1996. Egghead and SSI also
entered into a Fulfillment Agreement and a Call Center Lease relating to
the provision of certain support services by Egghead to SSI and to the
lease for a period of three years of a portion of Egghead's facility
previously used by the CGE division. The assets, liabilities, and results
of discontinued operations of the CGE division are presented separately in
the accompanying financial statements.

The income from discontinued operations for 1996, 1995, and 1994 is
comprised of the following (in thousands):

Fiscal year
-----------
1996 1995 1994
-------- -------- --------

Net sales $ 363.3 $ 428.5 $ 404.8
Costs and expenses 362.7 418.7 391.9
-------- -------- --------
Income before provision
for income taxes 0.6 9.8 12.9
Income tax expense 0.2 3.8 5.1
-------- -------- --------
Income from
discontinued operations $ 0.4 $ 6.0 $ 7.8
-------- -------- --------
-------- -------- --------

The net assets of discontinued operations for 1996 and 1995 consist of the
following (in thousands):

1996 1995
-------- --------
Accounts receivable - trade, net of allowance $ 61.7 $ 64.0
Merchandise inventory, net 9.3 4.4
Deferred taxes 0.8 1.7
-------- --------
Net current assets of discontinued operations $ 71.8 $ 70.1
-------- --------
-------- --------

NOTE 9 THEFT INSURANCE RECOVERY

Theft insurance recovery of $1.65 million in fiscal 1995 represents
settlement of an insurance claim, net of expenses, for inventory stolen
from numerous retail stores during fiscal years 1991, 1992, and 1993, by
members of a multi-state shoplifting ring.

<PAGE>

EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Notes to Consolidated Financial Statements (CONTINUED)

NOTE 10 SHAREHOLDER LITIGATION

On June 9, 1994, the Company announced that it had settled a shareholders'
lawsuit originally filed against the Company and two former officers who
were also directors. The action, originally entitled FINUCAN V. EGGHEAD,
ET AL., was filed in federal court in Seattle in September 1993 and was
alleged to be brought on behalf of all purchasers of the Company's common
stock between February 11, 1992, and November 18, 1992, (other than the
individual defendants and other individuals and entities otherwise
affiliated with the Company). The settlement called for a cash payment by
the Company of $2.625 million. Payment was made during fiscal 1995. This
settlement was approved by the United States District Court for the Western
District of Washington on January 12, 1995. Net of insurance recovery, the
settlement and related attorneys fees resulted in a pretax charge of $1.2
million in fiscal year 1994 ($0.04 per share, net of income tax impact).

<PAGE>

PART III

ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------

Directors

The Company's Board of Directors (the "Board") is divided into three
classes: Class I, Class II, and Class III. Each director serves for a term
ending at the third annual meeting of shareholders following the annual meeting
at which he or she was elected, except that any director appointed by the Board
serves, subject to election by the shareholders at the next annual meeting, for
a term ending at the annual meeting of shareholders for the class to which the
director was appointed. Each director serves until his or her successor is
elected and qualified or until his or her earlier death, resignation, or
removal.

CLASS II DIRECTORS (TERMS TO EXPIRE IN 1999)

STEVEN E. LEBOW, age 42, has been a director of the Company since November
1985. Mr. Lebow is a Managing Director of the Investment Banking Division of
Donaldson, Lufkin & Jenrette Securities Corporation, where he has been employed
since 1979.

LINDA FAYNE LEVINSON, age 54, has served as the President of Fayne Levinson
Associates, a general management consulting firm to consumer and financial
service organizations, since 1982. Ms. Levinson also serves as a member of the
Boards of Genentech, Inc., Jacobs Engineering Group Inc. and Administaff Inc.
Ms. Levinson was an executive at Creative Artists Agency, Inc. from 1993 through
February 1994 and was a partner of Wings Partners, a Los Angeles-based merchant
bank whose holdings include Northwest Airlines, from 1989 until 1993. Ms.
Levinson was a Senior Vice President at American Express Travel Related Services
Co., Inc. from 1984 until 1987, and was at McKinsey & Co., a worldwide general
management consulting firm, from 1972 through 1981, where she was made the first
woman partner in 1979. Ms. Levinson has been a director of the Company since
September 1993.

MELVIN A. WILMORE, age 50, was appointed a director of the Company in July
1996. Mr. Wilmore is a director and the President and Chief Operating Officer
("COO") of Ross Stores, Inc., a California based company which operates a
nationwide chain of retail clothing stores. He began his association with that
company in December 1991 as its Executive Vice President and COO, and was
promoted to President and elected to the Board of Directors in March 1993.
Prior to joining Ross Stores, Mr. Wilmore was President and Chief Executive
Officer of Live Specialty Retail, a division of LIVE Entertainment, Inc. which
operates a chain of prerecorded software home entertainment stores. He has been
employed by Zale Jewelry and currently serves on the Board of Directors of
Hechinger Company.

CLASS III DIRECTORS (TERMS TO EXPIRE IN 1997)

GEORGE P. ORBAN, age 50, has been a director of the Company since November
1985, and in May 1996 was appointed Chairman of the Board. Mr. Orban is Managing
Partner of Orban Partners, a private investment company, and a director and
co-founder of Ross Stores, Inc., which operates a chain of retail clothing
stores. He is also the founder of Office Mart Holdings Corporation, Inc., which
operates a chain of retail office products superstores, where he served as
Chairman of the Board until 1992.

ERIC P. ROBISON, age 36, was appointed a director of the Company in July
1996. Since 1994 Mr. Robison has been a Business Development Associate for
Vulcan Ventures Inc. ("Vulcan"), a venture capital firm wholly-owned by Paul
G. Allen, a former director of the Company. Mr. Robison's responsibilities
at Vulcan include overseeing investment opportunities for Mr. Allen as well
as providing strategic business consultation to the many companies controlled
by Mr. Allen. Prior to joining Vulcan, Mr. Robison was co-founder and
Vice President of The Stanton Robison Group, Inc., a business developement,
marketing and advertising consulting firm, from 1992 - 1993. During 1991 he
was a consultant with Stanton Bondo & Co. and for the two years before that,
he was Vice President of SGS, Inc., which is involved in the restaurant
business. He also serves on the Board of Directors for the following publicly
held companies: ARI Network Services, Inc. and C/NET, Inc.

CLASS I DIRECTORS (TERMS TO EXPIRE IN 1998)

RICHARD P. COOLEY, age 72, has been a director of the Company since
September 1992 and served as Chairman from February 1993 to June 1993. He was
Chairman of Seafirst Bank from January 1983 to December 1990, Chairman of the
Executive Committee of Seafirst Bank from January 1991 to March 1994, and was
named Honorary Director of Seafirst Bank in April 1994. Mr. Cooley also serves
as a director of Ackerley Comm., Inc.

<PAGE>

TERENCE M. STROM, age 52, has been a director and the President of the
Company since June 1993, and the Chief Executive Officer of the Company since
September 1993. From January 1990 until joining the Company, he served as Senior
Vice President of Marketing, and from July 1989 until December 1989 as Vice
President of Merchandising, of Best Buy Co., Inc., a consumer electronics retail
chain.

SAMUEL N. STROUM, age 75, has been a director of the Company since June
1984. He is the principal of Samuel Stroum Enterprises, a private investment
company, and the Chairman of MACS Air, Inc., an air charter company. From 1975
to April 1991, Mr. Stroum served as a director of both
Seafirst Bank and Seafirst Corporation. At Seafirst Corporation Mr. Stroum also
served on the Executive Committee and was Chairman of the Organization
Committee. He is also a Regent and Past President of the Board of Regents of the
University of Washington.

Executive Officers

-------------

TOMMY E. COLLINS, age 39, joined the Company in July 1995 as Director of
Management Information Systems ("MIS"). In May 1996 he was promoted to Vice
President of MIS. Prior to joining the Company, Mr. Collins spent ten years at
Key Tronic Corporation, serving for the last five years as Director of Corporate
Information Services. Key Tronic Corporation is an independent computer
peripheral manufacturing company.

KURT S. CONKLIN, age 43, joined the Company in August 1994 as Vice President
of Human Resources. In May 1996 he was promoted to Senior Vice President. From
June 1992 until joining the Company, Mr. Conklin was employed as the Vice
President of Human Resources and Purchasing at Key Tronic Corporation, a
computer peripheral manufacturing company. From August 1987 to August 1991, he
was the Vice President of Administration at Danzas Corporation, a freight
forwarding company.

DIANE E. COUSINEAU, age 46, was appointed Vice President of Stores in June
1995. Ms. Cousineau joined the Company in September 1990 as Director of Special
Projects, and served as Director of Retail Operations from February 1991 to June
1995. Prior to joining the Company, Ms. Cousineau was employed by Waldenbooks
for ten years, where she held various management positions, including Regional
Director of the Northeast.

PETER F. GROSSMAN, age 42, joined the Company in September 1994 as Vice
President of Retail and in August 1995 he was named Vice President of
Merchandising and Advertising. He was promoted to Executive Vice President in
May 1996. Prior to joining the Company, Mr. Grossman was employed by The Sharper
Image, a national retail and catalog sales company, where he served as Executive
Vice President of Merchandising from July 1993 to September 1994, and as Senior
Vice President of Merchandising from May 1990 to June 1993. He has also been
employed as a Vice President by Rich's/Goldsmith's and The Emporium, both
department store chains.

JAMES F. KALASKY, age 46, joined the Company as Merchandising Manager in
July 1995 and was promoted to Vice President of Merchandising in May 1996.
Previously Mr. Kalasky was Director of Merchandising at Damark International, a
membership driven consumer direct marketing company, from 1994 to 1995, and
before that, Vice President of Merchandising at Best Buy Co., Inc., a consumer
electronics retail chain, from 1992 to 1994. Prior to his association with Best
Buy Co., Inc., Mr. Kalasky was the Merchandising Manager for ten years at
Boscov's, a Pennsylvania based department store chain.

<PAGE>

KIRK W. LOCKHART, age 39, joined the Company in November 1994 as Vice
President of International. Since August 1995 he has also served as President of
the Company's wholly-owned subsidiary, ELEKOM Corporation. In May 1996 he
resigned as the Company's Vice President of International. From August 1993 to
October 1994, he was employed as Director of Strategic Planning by Best Buy Co.,
Inc., a consumer electronics retail chain. From June 1991 to August 1993, Mr.
Lockhart was Senior Manager of Strategic Information Systems at Pioneer North
America, a manufacturing company. Prior to that time Mr. Lockhart was employed
by CCH Computax from August 1981 to June 1991 as Director of Marketing.

RONALD J. SMITH, age 49, has been with the Company since 1987 and has been a
Senior Vice President since May 1996. He served as Vice President of
Distribution and Real Estate from September 1993 to May 1996. From May 1992
until August 1993, he was Vice President of Distribution. From July 1988 until
April 1992, Mr. Smith was the Company's Director of Distribution, and from
January 1988 until June 1988 he was General Manager of Distribution.

EDWARD S. WOZNIAK, age 50, joined the Company in May 1996 as Vice President,
Secretary and Chief Financial Officer. Before joining the Company he was
associated for over five years with the Thom McAn Shoe Company, a division of
Melville Corporation, where he most recently served as Senior Vice President and
Chief Financial Officer. Mr. Wozniak also has been employed by Federated
Department Stores, Inc. and the General Foods Corporation.

COMPLIANCE WITH SEC REPORTING REQUIREMENTS
------------------------

Officers and directors of the Company and persons who own more than
ten percent of the Company's stock are required to report to the
Securities and Exchange Commission ("SEC") ownership and changes in
ownership of the Company's stock. Regulations promulgated by the SEC require
the Company to disclose to its shareholders those filings that were not made
on a timely basis. Based solely on its review of copies of such reports
received by it, or written representations received from reporting persons
that no such forms were required for those persons, the Company believes
that, during fiscal year 1996, its officers and directors complied with
all applicable filing requirements, with the following exceptions: Messrs.
Ron Foster and Glenn Johnson, both former Vice Presidents of the Company,
filed late their respective initial beneficial ownership reports on Form 3
that were required to be filed in connection with the commencement of their
employment as executive officers of the Company.

<PAGE>

ITEM 11.
EXECUTIVE COMPENSATION
- ------------------------

ANNUAL AND LONG-TERM COMPENSATION

The following table sets forth annual and long-term compensation for
services rendered during fiscal years 1996, 1995, and 1994, by Mr. Stroum, the
Company's Chief Executive Officer, and the other Named Executive Officers.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
FISCAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR (1) ($) (1) ($) ($) OPTIONS (#) ($) (2)
- ---------------------------------------- -------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Terence M. Strom (3) ................... 1996 $299,994 $ 0 $70,395 0 $ 0
President and Chief 1995 300,000 300,000 0 50,000 0
Executive Officer 1994 230,769 852,500 31,075 268,000 N/A
Brian W. Bender (4) .................... 1996 196,442 30,080 53,804 45,000 0
Vice President, Chief 1995 N/A N/A N/A N/A N/A
Financial Officer and 1994 N/A N/A N/A N/A N/A
Secretary
Peter F. Grossman (5) .................. 1996 230,000 0 58,273 20,000 4,423
Executive Vice 1995 123,846 0 5,846 40,000 0
President 1994 N/A N/A N/A N/A N/A
Ronald J. Smith (6) .................... 1996 150,000 77,943 56,459 20,000 3,398
Senior Vice President 1995 147,308 0 0 25,000 1,247
1994 120,731 0 0 0 2,233
Kurt S. Conklin (7) .................... 1996 140,000 62,940 65,702 20,000 3,951
Senior Vice President 1995 70,615 0 21,800 25,000 0
1994 N/A N/A N/A N/A N/A
</TABLE>

- ------------------------
(1) Fiscal years 1996, 1995 and 1994 each had 52 weeks.

(2) Amounts represent contributions by the Company to the Company's Nest Egg
401(k) savings plan on behalf of participating Named Executive Officers.

(3) Mr. Strom joined the Company in June 1993. The salary shown for fiscal year
1994 is for a partial fiscal year's employment. Mr. Strom's bonus for fiscal
year 1995 represents a guaranteed bonus based on his employment agreement,
the term of which ended June 28, 1996. His fiscal year 1994 bonus represents
a grant of 68,000 shares of Common Stock upon the commencement of his
employment, valued at the market price of such shares on the date of grant,
and a $300,000 guaranteed cash bonus. Other Annual Compensation in fiscal
year 1994 include amounts paid for costs associated with the sale of Mr.
Strom's prior residence upon commencement of his employment with the Company
and in fiscal year 1996 includes amounts paid for relocation expenses
incurred as a result of the relocation of corporate headquarters.

<PAGE>

(4) Mr. Bender joined the Company in May 1995. The salary shown for fiscal
year 1996 is for a partial fiscal year's employment. Other Annual
Compensation in fiscal year 1996 represents amounts paid for relocation
costs related to the sale of Mr. Bender's prior residence and the cost
of temporary housing upon commencement of his employment with the
Company. In fiscal year 1996 he received a bonus of $30,080 for his
contribution to the relocation of the Company's corporate headquarters.
Mr. Bender resigned from the Company in May 1996.

(5) Mr. Grossman's Other Annual Compensation in fiscal year 1996 is comprised
of amounts paid for relocation expenses incurred as a result of the
relocation of the corporate headquarters. Other Annual Compensation
in fiscal year 1995 consists of amounts paid for relocation costs
associated with the commencement of Mr. Grossman's employment with
the Company. Amounts for fiscal year 1994 are not applicable as
Mr. Grossman did not begin his employment with the Company until fiscal
year 1995.

(6) In fiscal year 1996, Mr. Smith received an aggregate bonus of $77,943 for
his contribution to the relocation of the Company's headquarters and the
relocation of the Company's former Corporate, Government and Education
division. Other Annual Compensation includes amounts paid for expenses
incurred as a result of the relocation of the Company's headquarters.

(7) In fiscal year 1996, Mr. Conklin received an aggregate bonus of $62,940
for his contribution to the relocation of the Company's headquarters
and the relocation of the Company's former Corporate, Government and
Education division. Other Annual Compensation in fiscal year 1996 consists
of amounts paid for expenses incurred as a result of the relocation of
the Company's headquarters. Other Annual Compensation in fiscal year 1995
consists of amounts paid for relocation costs associated with the
commencement of Mr. Conklin's employment with the Company. Amounts for
fiscal year 1994 are not applicable as Mr. Conklin did not begin his
employment with the Company until fiscal year 1995.

OPTION GRANTS IN FISCAL YEAR 1996

The following table sets forth stock option grants during fiscal year ended
March 30, 1996, to Mr. Strom, the Company's Chief Executive Officer, and the
other Named Executive Officers, pursuant to the Company's 1993 Stock Option Plan
and the Company's 1986 Combined Incentive and Non-Qualified Stock Option Plan.

OPTION GRANTS IN FISCAL YEAR 1996

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
- ------------------------------------------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK
SECURITIES PRICE APPRECIATION FOR
UNDERLYING % OF TOTAL OPTION TERM
OPTIONS OPTIONS GRANTED EXERCISE ------------------------
GRANTED TO EMPLOYEES PRICE EXPIRATION 5% 10%
NAME (#) (1) IN FISCAL YEAR ($/SHARE) DATE ($) (2) ($) (2)
- --------------------------------- ----------- ------------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Terence M. Strom................. 0 0.0% N/A N/A $ 0 $ 0
Brian Bender..................... 40,000 6.5% 9.8800 5/18/05 248,413 629,528
5,000 0.8% 10.7500 6/7/05 33,803 85,664
Peter F. Grossman................ 20,000 3.2% 10.7500 6/7/05 135,212 342,655
Ronald J. Smith.................. 20,000 3.2% 10.7500 6/7/05 135,212 342,655
Kurt S. Conklin.................. 20,000 3.2% 10.7500 6/7/05 135,212 342,655
</TABLE>

- ------------------------

(1) Options granted are nonqualified options, have terms of ten years from the
date of grant and become exercisable over a three year period in increments
of one-sixth, one-third and one-half of the total, respectively. The options
were granted at fair market value on the date of grant. Upon the occurrence
of certain business combination transactions, the exercisability of the
options

<PAGE>

would be accelerated or assumed by the surviving or acquiring corporation.
(SEE "EXECUTIVE COMPENSATION -- CHANGE OF CONTROL ARRANGEMENTS-OPTION
PLANS.")

(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to expiration of their terms
assuming the specified compounded rates of appreciation on the base price
(5% and 10%) of the Common Stock over the terms of the options. The 5% and
10% amounts are calculated based on rules required by the Securities and
Exchange Commission and do not reflect the Company's estimate of future
stock price growth. Actual gains, if any, on stock option exercises are
dependent on the timing of such exercises and the future performance of the
Common Stock. There can be no assurance that the rates of appreciation
assumed in these columns can be achieved or that the amounts reflected will
be received by the individuals.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996 AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth information with respect to stock option
grants made under the Company's stock option plans to Mr. Strom, the Chief
Executive Officer, and the other Named Executive Officers, including (i) the
number of shares of Common Stock purchased upon exercise of options in fiscal
year 1996; (ii) the net value realized upon such exercise; (iii) the number of
unexercised options outstanding at March 30, 1996; and (iv) the value of
unexercised in-the-money options at March 30, 1996.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996
AND
FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR END (1)
ON EXERCISE REALIZED -------------------------- --------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- --------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Terence M. Strom..................... 0 $ 0 108,335 141,665 $ 259,897 $ 274,478
Brian Bender......................... 0 0 0 45,000 0 32,500
Peter F. Grossman.................... 0 0 6,668 53,332 25,422 127,078
Ronald J. Smith...................... 0 0 14,668 42,332 18,756 93,744
Kurt S. Conklin...................... 0 0 1,251 26,249 4,769 23,824
</TABLE>

- ------------------------
(1) Values are based on the difference between the option exercise price and the
fair market value on March 30, 1996 ($10.6875 per share as quoted in the
Nasdaq National Market), multiplied by the respective number of vested and
unvested shares underlying the option.

<PAGE>

CHANGE OF CONTROL ARRANGEMENTS

CHANGE OF CONTROL AGREEMENTS. In July 1996 the Company entered into Senior
Management Employment Agreements with Peter F. Grossman, Ronald J. Smith, Kurt
S. Conklin, Edward S. Wozniak, Tommy E. Collins, James F. Kalasky, Diane E.
Cousineau and eight other executives. These agreements provide certain benefits
in the event that, during the two-year period after execution, such executive's
employment is terminated by the Company for any reason other than "cause" or by
the executive for "good reason" (as both terms are defined in the agreement)
following a "change of control" of the Company. Such benefits include (i)
payment of the executive's base salary for the balance of such two-year period,
(ii) payment of an amount equal to such executive's annual base salary for one
year following termination (or six months in the case of certain executives) and
(iii) continuation of life insurance, disability, medical and dental, and other
similar employee benefits for the balance of such two-year period or for one
year (or six months in the case of certain executives), whichever is longer.
Such benefits are also payable by the Company in the event of the executive's
death or disability following a change of control of the Company. All amounts
payable under the Senior Management Employment Agreements are subject to the
limitation that no amounts that would constitute an excess parachute payment
(within the meaning of Section 280G(b) of the Internal Revenue Code) may be paid
to any executive. On each anniversary, the Senior Management Employment
Agreements are automatically extended for an additional year, unless the Company
notifies the executive at least sixty (60) days prior to such anniversary.

Except as described in the foregoing paragraphs, the Company has not entered
into any employment agreements with its executive officers as of the date of
this proxy statement.

OPTION PLANS. The Company's stock option plans provide that, upon the
occurrence of certain transactions, including certain mergers and other business
combinations involving the Company, outstanding options will fully vest, subject
to termination upon consummation of such transaction. In the alternative, at the
discretion of the Company and the corporation(s) participating in such
transactions, such options may be assumed by the acquiring or surviving
corporation.

DIRECTOR PLAN. The Company's Non-employee Director Stock Option Plan
provides that upon the occurrence of certain transactions, including certain
mergers and business combinations involving the Company, the vesting of
outstanding options will be accelerated so that all options would be immediately
exercisable. Any options not exercised would terminate upon
consummation of such a transaction.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.

Messrs. Stroum and Orban, and Ms. Levinson, all shareholders and
directors of the Company, together with Mr. Paul G. Allen, former director,
were all members of the Compensation Committee of the Board during fiscal
year 1996.

Mr. Allen is a shareholder and director of Microsoft Corporation, the
founder and Chairman of Asymetrix Corporation, and the President and sole
shareholder of Vulcan Ventures Inc. In fiscal year 1996, aggregate software
purchases by the Company directly from Microsoft were approximately
$158,258,685. Additional Microsoft products were purchased by the Company
through third-party distributors. In fiscal year 1996, aggregate purchases by
the Company from Asymetrix were approximately $605,613. Both Asymetrix and
Microsoft purchased products directly from the Company during fiscal year 1996
in the respective amounts of $112,186 and $9,838,497. All of such purchases were
made in the ordinary course of business at prevailing rates for corporate
customers. In a stock purchase agreement among Vulcan Ventures Inc. and certain
shareholders of the Company (including certain of the Company's directors) dated
June 18, 1987, such shareholders agreed to use their best efforts to encourage
the Company and its subsidiaries to do business with the above entities as well
as with any other affiliate of Mr. Allen or Vulcan Ventures Inc., provided the
transaction is on an arm's-length basis.

<PAGE>

Mr. Stroum and his daughter, Marsha Sloan Glazer, were directors and
shareholders of SureFind Corp. ("SureFind"), a company providing electronic
interactive products, that was dissolved during fiscal year 1996. Mr. Allen
(through Vulcan Ventures Inc.), Mr. Lebow, and another of Mr. Stroum's
daughters, Cynthia Stroum Meagher, were also shareholders of SureFind until its
dissolution. In July 1993, SureFind and the Company entered into an Interactive
Express' Services Agreement ("Agreement"), having a term of approximately three
and one-half years, under which SureFind was contracted to develop and license a
telephonic information order system for the Company for approximately $700,000,
plus certain service fees, subject to certain credits. In May 1994, SureFind and
the Company agreed to modify the Agreement and settle obligations incurred to
date at $600,000. The modification, having a term of two years from the original
Agreement date, provided for payment to SureFind by the Company of a minimum of
$30,000 per month, plus certain service fees, subject to certain credits, for
ongoing project support and development of additional applications for the
Company. Pursuant to the terms of the modification, the Agreement terminated in
July 1995. During fiscal year 1996 prior to such termination, the Company paid
SureFind an aggregate amount of $180,000 for such services.

The Company has entered into an arrangement with Retail Enterprises, Inc.
("Retail Enterprises"), a retail consulting firm wholly-owned by George P.
Orban, Chairman of the Company's Board of Directors. Pursuant to the
arrangement, Retail Enterprises will provide consulting services and advice to
the Company on retail strategy. The Company will pay Retail Enterprises a
consulting fee of $25,000 per month for such services.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

OVERVIEW AND PHILOSOPHY. The Compensation Committee of the Board (the
"Committee") is responsible for recommending to the Board compensation for the
Company's five highest-compensated executive officers, including the Company's
Chief Executive Officer, and for reviewing and approving compensation
recommendations made by the Chief Executive Officer for the other executive
officers. The Committee is also responsible for administering all of the
Company's compensation programs.

The Committee's goal is to provide compensation that is fair and competitive
and that will reward sustained high performance. The Committee also believes
that executives should have the opportunity for a significant portion of their
compensation to be "at risk" in the form of incentive compensation. The
Company's executive compensation packages generally consist of base salary,
annual incentive compensation in the form of bonuses, and long-term incentive
compensation in the form of stock options. The Committee also administers and
reviews any employment agreements between the Company and its executives.

BASE SALARY. In determining the base salary for a particular executive
within the salary range for his or her position, the Committee initially takes
into account the salary necessary to encourage the executive to join the Company
in lieu of pursuing other employment opportunities. In later years, the
Committee considers the amount budgeted by the Board for salary increases and
the executive's success in achieving the performance objectives established
annually for such executive. The performance objectives established annually for
executives consist of both quantitative goals (such as increasing revenue,
margin or number of accounts, or decreasing returns) and qualitative goals (such
as training subordinates, managing special projects, and responding to changing
market conditions). There is generally no specific weighing of these factors.
The base salaries received by the Named Executive Officers (other than the Chief
Executive Officer) generally are above the median for base salaries of
executives in similar positions at companies in the comparison group (the
"Comparison Group"), which is composed of national retail companies with annual
revenues ranging from $100 million to $2.5 billion, none of which companies are
included in the CRSP Index for Nasdaq Stock Market (SIC 573) used in the
Company's stock price performance graph which appears later in this
document. The Company does not have a target range for base salaries for
executive officers.

<PAGE>

ANNUAL INCENTIVE COMPENSATION. In fiscal year 1996, cash bonuses for
executives were considered at the end of the fiscal year by the Committee in
consultation with the Chief Executive Officer. Such consultation took into
consideration the Company's financial performance, including the Company's
earnings per share. Based upon the Company's financial performance, no executive
officer received a bonus for fiscal year 1996, except as follows: Brian Bender,
former Vice President, Secretary and Chief Financial Officer, received an
aggregate bonus of $30,080 based upon his contribution to the relocation of the
Company's headquarters; Kurt Conklin and Ronald Smith each received aggregate
bonuses in the respective amounts of $62,940 and $77,943, which were based upon
their contribution to the relocation of the Company's headquarters and the
relocation of the Company's former Corporate, Government and Education ("CGE")
division; and Ronald Foster, former Vice President of Operations, received a
bonus of $45,746 based upon his contribution to the relocation of the Company's
former CGE division.

LONG-TERM INCENTIVE COMPENSATION. The primary objective of the Company's
stock option program is to provide incentives tied to the performance of the
Company as measured by stock price appreciation. The Committee believes that the
Company's stock option program better aligns the interests of the Company's
executives with those of its shareholders. The Committee generally grants
nonqualified stock options with an exercise price equal to the fair market value
of the Common Stock on the date of grant and a three year vesting schedule.

In granting options, the Committee considers the amount and value of options
currently held, but does not have a target ownership level for Common Stock
holdings for executives. In fiscal year 1996, the Committee granted options to
purchase 621,100 shares of Common Stock, of which options to purchase 185,000
shares were granted to executive officers, four of which are Named Executive
Officers as referred to throughout this document, and the remaining 436,100 were
granted to a broad range of employees, generally fixed by salary grade. Within
the group of executive officers, the exact number of shares subject to options
was recommended to the Committee by the Chief Executive Officer based upon the
performance factors discussed under "Base Salary" above.

CHIEF EXECUTIVE OFFICER COMPENSATION. Mr. Strom joined the Company as its
President in June 1993. He became Chief Executive Officer in September 1993. Mr.
Strom's compensation was governed in fiscal year 1996 by the terms of an
employment agreement, which provided that he receive an annual base salary of
$300,000 in fiscal year 1996, and an annual bonus (up to a maximum of 100% of
his annual base salary) depending upon his achieving performance goals to be
established for each fiscal year, with a minimum bonus of $300,000 for each of
fiscal years 1994 and 1995. No bonus was paid to Mr. Strom for fiscal year 1996.
The employment agreement expired on June 28, 1996. Additionally, upon
commencement of employment, Mr. Strom received a stock grant of 68,000 shares of
Common Stock and options to purchase an additional 200,000 shares. On November
30, 1994, Mr. Strom was granted a second option to purchase 50,000 shares. Both
options vest over a three-year period from date of grant in annual increments of
one-sixth, one-third, and one-half of the total shares. No stock options were
granted to Mr. Strom in fiscal year 1996. The Chief Executive Officer's total
compensation is slightly below the median for total annual compensation for
executive officers in a similar position at companies in the Comparison Group.

In structuring Mr. Strom's compensation, the Committee seeks to reward him
for successful performance at the Company. In addition, the Committee believes
that Mr. Strom's participation in the Company's stock price appreciation through
his stock and option grants will encourage him to remain with the Company and
align his interests with those of the shareholders.

COMPENSATION COMMITTEE
Richard P. Cooley
Steven E. Lebow
Linda Fayne Levinson
Samuel N. Stroum, Chairman

<PAGE>

NON-EMPLOYEE DIRECTORS' COMPENSATION

Directors who are not also employees of the Company are compensated at the
rate of $25,000 per annum. In addition, non-employee directors receive $1,000
for each Board meeting attended and $1,000 for each Committee meeting attended,
provided that such Committee meeting is not held in conjunction with a Board
meeting. Non-employee directors are also reimbursed for actual travel and
out-of-pocket expenses incurred in connection with Board membership.

Pursuant to the Egghead, Inc. Non-Employee Director Stock Option Plan
("Plan"), each non-employee director is granted an option to purchase 22,500
shares of Common Stock upon his or her initial election to the Board at an
annual shareholders meeting, subject to three-year vesting in annual increments
of one-third. In addition, pursuant to this Plan, each non-employee director who
is initially elected or appointed other than at an annual shareholders meeting
is granted an option to purchase up to 7,500 shares of Common Stock, prorated
for the number of months between the date of grant and the next annual
shareholders meeting thereafter, subject to vesting in full on the date of such
meeting. Each non-employee director who was in office on June 7, 1995 received a
grant of an option to purchase 13,500 shares of Common Stock on that date. Each
such option is two-thirds vested and subject to vesting of the remaining
one-third on the date of the 1996 Annual Meeting. Under the
Plan, each non-employee director who holds an option granted on or after June 7,
1995 that becomes fully vested thereafter automatically will be granted, on
the day after the annual shareholders' meeting at which the prior option has
become fully vested, an additional option to purchase 22,500 shares, subject
to three-year vesting in annual increments of one-third.

STOCK PRICE PERFORMANCE GRAPH

The following two graphs show a comparison of cumulative total shareholder
returns for the Company for the last five fiscal years ("Cumulative Shareholder
Returns"), with the cumulative total return of the University of Chicago's
Center for Research in Security Prices ("CRSP") Index for the Nasdaq Stock
Market, U.S. and Foreign (the "Nasdaq Stock Market Index"). The first graph
below shows a comparison of Cumulative Shareholder Returns and the cumulative
total return of the Nasdaq Stock Market Index with the cumulative total return
of the CRSP Index for the Nasdaq Stock Market Standard Industrial
Classification ("SIC") Code 573, a Retail Trade index that includes computer
and software stores (the "Nasdaq Index SIC 573"). The second graph shows a
comparison of Cumulative Shareholder Returns and the cumulative total return of
the Nasdaq Stock Market Index with the cumulative total shareholder return of
the Nasdaq Stock Market SIC 504 Index, a Wholesale Trade SIC that includes
computers, computer peripherals and computer software, combined with SIC 573,
a Retail Trade SIC that includes computer and software stores (the "Nasdaq
Index Combined SIC 504 & 573").

Due to the change in the Company's business resulting from the sale of
its former Corporate, Government and Education ("CGE") division, the
Company has selected a line of business index, the Nasdaq Index SIC 573,
that represents a retail line of business, by contrast to the Nasdaq Index
Combined SIC 504 & 573 which includes both retail and wholesale trade SIC
codes and was used in the performance graph in the Company's 1995 proxy
statement. Since the scope of the Company's business will now be restricted
solely to retail, the Company believes that the Nasdaq Index SIC 573 is
more representative of the Company's line of business than the Nasdaq Index
Combined SIC 504 & 573. However, the CGE sale occurred close to the end of
fiscal year 1996, and the graphs shown below include a comparison of the
Company's total return with that of both the newly selected Nasdaq Index SIC
573 as well as the Nasdaq Index Combined SIC 504 & 573 used in last year's
proxy statement.

Each comparison assumes $100 was invested in the Company's Common Stock
on March 30, 1991, in each of the foregoing indices, and assumes reinvestment
of dividends, if any. The Company has not paid dividends. The stock
performance shown on the graphs below is not necessarily indicative of
future price performance.

<PAGE>

COMPARISON OF FIVE YEAR-CUMULATIVE TOTAL RETURNS
PEFORMANCE GRAPH FOR
EGGHEAD, INC.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
EGGHEAD, INC. NASDAQ STOCK MARKET INDEX NASDAQ INDEX SIC-573 (US + FOREIGN)
<S> <C> <C> <C>

(U.S. & Foreign)
3/28/91 100 100 100
4/30/91 96.7 100.6 101.2
5/31/91 98.3 105.3 110.7
6/28/91 95.0 99.1 107.5
7/31/91 90.0 104.9 114.7
8/30/91 103.3 109.9 127.3
9/30/91 116.7 110.5 135.9
10/31/91 140.0 114.1 133.5
11/29/91 115.0 110.3 121.2
12/31/91 111.7 123.4 116.0
1/31/92 128.3 130.8 139.9
2/28/92 166.7 133.7 168.4
3/27/92 180.0 127.5 155.6
4/30/92 166.7 122.1 140.4
5/29/92 145.0 123.6 132.9
6/30/92 122.5 118.9 121.8
7/31/92 123.3 122.8 117.9
8/31/92 66.7 119.1 102.4
9/30/92 59.2 123.3 114.1
10/30/92 66.7 128.0 132.3
11/30/92 66.7 138.0 140.8
12/31/92 65.8 143.2 142.0
1/29/93 65.8 147.4 147.2
2/26/93 54.2 142.1 139.3
4/2/93 52.5 146.4 141.7
4/30/93 54.2 140.6 133.6
5/28/93 57.5 149.0 140.1
6/30/93 54.2 150.0 129.3
7/30/93 47.5 150.2 131.5
8/31/93 48.3 158.0 137.2
9/30/93 46.7 162.5 151.6
10/29/93 49.2 166.2 153.5
11/30/93 57.5 161.0 149.6
12/31/93 60.0 165.7 141.7
1/31/94 63.3 171.0 133.8
2/28/94 63.3 169.2 127.6
3/31/94 57.5 158.8 114.0
4/29/94 56.7 156.7 106.2
5/31/94 52.5 156.9 100.3
6/30/94 48.3 150.7 92.9
7/29/94 44.2 154.3 93.9
8/31/94 45.8 163.7 97.4
9/30/94 47.5 163.4 101.8
10/31/94 56.7 166.3 101.5
11/30/94 68.3 160.5 105.0
12/30/94 78.3 160.3 98.3
1/31/95 71.7 161.0 96.9
2/28/95 70.0 169.3 90.1
3/31/95 56.7 174.1 86.6
4/28/95 63.3 179.1 85.3
5/31/95 68.3 183.6 86.9
6/30/95 89.2 198.0 96.0
7/31/95 87.5 211.7 96.3
8/31/95 80.0 215.5 96.0
9/29/95 54.2 221.9 86.7
10/31/95 45.8 219.7 75.2
11/30/95 53.3 224.2 69.6
12/29/95 42.9 222.7 58.0
1/31/96 40.8 223.2 55.5
2/29/96 38.8 232.1 54.1
3/29/96 71.3 232.8 60.6
</TABLE>

Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a
trading day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 03/28/91.

<PAGE>

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
EGGHEAD, INC. NASDAQ STOCK MARKET INDEX NASDAQ INDEX COMBINED SIC 504 & 573
<S> <C> <C> <C>
(US & Foreign) (US + Foreign)
3/28/91 100 100 100.0
4/30/91 96.7 100.6 100.1
5/31/91 98.3 105.3 109.6
6/28/91 95.0 99.1 108.5
7/31/91 90.0 104.9 121.8
8/30/91 103.3 109.9 133.4
9/30/91 116.7 110.5 147.2
10/31/91 140.0 114.1 156.8
11/29/91 115.0 110.3 144.0
12/31/91 111.7 123.4 144.3
1/31/92 128.3 130.8 166.4
2/28/92 166.7 133.7 197.2
3/27/92 180.0 127.5 180.7
4/30/92 166.7 122.1 161.5
5/29/92 145.0 123.6 157.1
6/30/92 122.5 118.9 143.0
7/31/92 123.3 122.8 139.1
8/31/92 66.7 119.1 120.5
9/30/92 59.2 123.3 135.3
10/30/92 66.7 128.0 151.6
11/30/92 66.7 138.0 162.1
12/31/92 65.8 143.2 162.6
1/29/93 65.8 147.4 174.4
2/26/93 54.2 142.1 165.9
4/2/93 52.5 146.4 169.4
4/30/93 54.2 140.6 155.6
5/28/93 57.5 149.0 167.8
6/30/93 54.2 150.0 159.7
7/30/93 47.5 150.2 165.0
8/31/93 48.3 158.0 172.1
9/30/93 46.7 162.5 183.0
10/29/93 49.2 166.2 187.4
11/30/93 57.5 161.0 182.2
12/31/93 60.0 165.7 186.8
1/31/94 63.3 171.0 182.3
2/28/94 63.3 169.2 182.7
3/31/94 57.5 158.8 162.0
4/29/94 56.7 156.7 154.3
5/31/94 52.5 156.9 153.0
6/30/94 48.3 150.7 133.0
7/29/94 44.2 154.3 136.3
8/31/94 45.8 163.7 140.0
9/30/94 47.5 163.4 140.9
10/31/94 56.7 166.3 141.1
11/30/94 68.3 160.5 140.6
12/30/94 78.3 160.3 135.9
1/31/95 71.7 161.0 138.2
2/28/95 70.0 169.3 133.6
3/31/95 56.7 174.1 140.6
4/28/95 63.3 179.1 141.7
5/31/95 68.3 183.6 144.0
6/30/95 89.2 198.0 156.0
7/31/95 87.5 211.7 166.1
8/31/95 80.0 215.5 167.8
9/29/95 54.2 221.9 171.1
10/31/95 45.8 219.7 157.5
11/30/95 53.3 224.2 159.0
12/29/95 42.9 222.7 163.0
1/31/96 40.8 223.2 160.8
2/29/96 38.8 232.1 169.4
3/29/96 71.3 232.8 167.1
</TABLE>

ITEM 12. COMMON STOCK OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information relating to the beneficial
ownership, as of July 22, 1996, of the Company's Common Stock for the
following persons: (i) each person known by the Company to be the beneficial
owner of more than five percent of the outstanding shares of Common Stock;
(ii) each director and nominee as of the date hereof; (iii) the Chief
Executive Officer of the Company; (iv) the four highest paid executive
officers of the Company during fiscal year 1996 (collectively, with
the Chief Executive Officer, the "Named Executive Officers"); and (v)
all directors, nominees, and executive officers of the Company as a group.

BENEFICIAL OWNERSHIP

<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------
AMOUNT AND NATURE OF
BENEFICIAL PERCENT OF SHARES
OWNERSHIP (1) OUTSTANDING
---------------------- -----------------
<S> <C> <C>
GREATER THAN 5% SHAREHOLDERS (2)
Cramer Rosenthal McGlynn, Inc. (3) .................................... 1,718,550 9.78%
707 Westchester Avenue
White Plains, New York 10604
Morgan Stanley Asset Management Ltd. (4) .............................. 1,764,850 10.04%
25 Cabot Square, Canary Wharf
London, E14 4QA, England
Vanguard Explorer Fund, Inc. (5) ...................................... 900,000 5.12%
P O Box 2600
Valley Forge, PA 19482-2600
Wellington Management Company (6) ..................................... 900,000 5.12%
75 State Street
Boston, MA 02109
David A. Rocker (7) ................................................... 1,644,900 9.36%
45 Rockefeller Plaza, Suite 1759
New York, New York 10111
Paul G. Allen (8) ..................................................... 1,666,934 9.47%
110 - 110th N.E. Ave., #550
Bellevue, WA 98004
DIRECTORS AND NOMINEES
Richard P. Cooley (9).................................................. 27,500 *
Steven E. Lebow (10)................................................... 32,210 *
Linda F. Levinson (11)................................................. 22,500 *
George P. Orban (12)................................................... 213,994 1.22%
Eric P. Robison (13)................................................... 1,250 *
Terence M. Strom (14).................................................. 276,335 1.55%
Samuel N. Stroum (15).................................................. 172,596 *
Melvin A. Wilmore (16)................................................. 1,250 *
NAMED EXECUTIVE OFFICERS (17)
Brian W. Bender........................................................ 0 *
Peter F. Grossman(18).................................................. 24,747 *
Ronald J. Smith (19)................................................... 30,227 *
Kurt S. Conklin (20)................................................... 5,833 *
All of the above directors and nominees, the Named Executive Officers,
and other executive officers as a group (17 persons) (21)............. 833,021 4.6%
</TABLE>

- ------------------------

* Percentage of beneficial ownership is less than one percent

(1) The persons named in the above table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them, except as otherwise described in these footnotes. As noted in these
footnotes, shares beneficially owned may include shares subject to options
that are exercisable within 60 days from July 22, 1996 (i.e., September 20,
1996).

<PAGE>

(2) Deemed beneficial owners of the shares by virtue of the direct or indirect
investment and/or voting discretion possessed pursuant to the provisions of
investment advisory agreements with their clients or other fiduciary
arrangements such as partnership agreements.

(3) Based on Schedule 13G Statement filed with the Securities and Exchange
Commission ("SEC") dated May 1, 1996.

(4) Based on joint filing of Amendments No. 1 and 2 to Schedule 13G Statement
of Morgan Stanley Group, Inc. and its wholly owned subsidiary, Morgan
Stanley Asset Management Limited, filed with the SEC and dated February 13,
1996 and February 16, 1996, respectively.

(5) Based on Schedule 13G Statement filed with the SEC dated February 14, 1996.
Vanguard Explorer Fund, Inc. ("Vanguard") has sole voting power and shared
investment power with respect to these shares. These shares are the same
shares reported in the table as beneficially owned by Wellington Management
Company ("Wellington") with respect to which Wellington filed a Schedule
13G Statement as noted below in footnote (6).

(6) Based on Schedule 13G Statement filed with the SEC dated January 29, 1996.
Wellington has shared investment power and no voting power with respect to
these shares. These shares are the same shares reported in the table as
beneficially owned by Vanguard with respect to which Vanguard filed a
Schedule 13G as noted above in footnote (5).

(7) Based on Amendments No. 3 and 4 to Schedule 13D Statement filed with the
SEC, dated November, 9, 1995 and February 21, 1996, respectively.

(8) Includes 1,648,934 shares held by Vulcan Ventures Inc., a private
investment firm of which Mr. Allen is President and sole shareholder, and
18,000 shares subject to options that are exercisable now or within 60 days
of July 22, 1996.

(9) Includes 5,000 shares held directly and 22,500 shares subject to options
that are exercisable now or within 60 days of July 22, 1996.

(10) Includes 9,710 shares held directly and 22,500 shares subject to options
that are exercisable now or within 60 days of July 22, 1996.

(11) Represents 22,500 shares subject to options that are exercisable now or
within 60 days of July 22, 1996.

(12) Includes 84,000 shares held by Orban Partners, a general partnership of
which Mr. Orban is General Partner, 107,494 shares held directly, and
22,500 shares subject to options that are exercisable now or within 60 days
of July 22, 1996.

(13) Represents 1,250 shares subject to options that are exercisable now or
within 60 days of July 22, 1996.

(14) Includes 68,000 shares held directly and 208,335 shares subject to options
that are exercisable now or within 60 days of July 22, 1996.

(15) Includes 150,002 shares held directly, 94 shares owned with his spouse, and
22,500 shares subject to options that are exercisable now or within 60 days
of July 22, 1996. Does not include 150,000 shares transferred by Mr. Stroum
to the Stroum Foundation and 150,000 shares transferred by Mr. Stroum to
the Stroum Family Foundation, with respect to which Mr. Stroum disclaims
beneficial ownership.

(16) Represents 1,250 shares subject to options that are exercisable now or
within 60 days of July 22, 1996.

(17) Brian W. Bender, Peter F. Grossman, Ronald J. Smith and Kurt S. Conklin are
included as Named Executive Officers of the Company because they were the
four most highly paid executive officers during fiscal year 1996, other
than the Chief Executive Officer. Terence M. Strom, the Chief Executive
Officer, is also a Named Executive Officer.

(18) Includes 1,413 shares held directly and 23,334 shares subject to options
exercisable now or within 60 days of July 22, 1996.

(19) Includes 2,393 shares held directly and 27,834 shares subject to options
exercisable now or within 60 days of July 22, 1996.

(20) Represents shares subject to options exercisable now or within 60 days of
July 22, 1996.

(21) Includes shares subject to options exercisable now or within 60 days of
July 22, 1996.

<PAGE>

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
------------------------

During fiscal year 1996, Steven E. Lebow and Samuel N. Stroum,
shareholders and directors of the Company, and Paul G. Allen, a director
during fiscal year 1996, were parties to certain transactions with the
Company. (SEE "EXECUTIVE COMPENSATION -- COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION.")

Richard P. Cooley, a shareholder and director of the Company, serves as an
Honorary Director of Seafirst Bank. On December 8, 1995, the Company entered
into a Revolving Loan Agreement with Seattle-First National Bank ("Seafirst
Bank") and U.S. Bank of Washington, National Association, which provided for
secured borrowings of up to $35,000,000. The Revolving Loan Agreement expired
April 30, 1996 and was not renewed.

On March 25,1996 the Company announced it had entered into an agreement to
sell to Software Spectrum, Inc., a Texas corporation, the Company's CGE
division. The sale was effective May 13, 1996. Steven E. Lebow, a shareholder
and director of the Company, is a Managing Director of the Investment Banking
Division of Donaldson, Lufkin, & Jenrette Securities Corporation ("DLJ"), an
investment banking firm that assisted the Company with the CGE transaction.
During fiscal year 1996 the Company employed DLJ to represent the Company in
connection with the proposed sale of the assets of the Company's former CGE
division. In this connection, DLJ was paid a fee of $1,210,200.

INDEBTEDNESS OF MANAGEMENT

The following table sets forth information for fiscal year 1996 with respect
to certain loans made to executive officers by the Company.

<TABLE>
<CAPTION>
LARGEST AMOUNT
RATE OF OUTSTANDING DURING AMOUNT OUTSTANDING
NAME REASON INTEREST FY1996 AS OF 7/22/96
- ---------------------------------- -------------------------- ------------ ------------------ -------------------------
<S> <C> <C> <C> <C>
Brian W. Bender .................. Moving expenses 6.0% $ 110,541 0
Former Vice President and
Chief Financial Officer
Peter F. Grossman ................ Moving expenses 6.0% $ 83,400 0
Executive Vice President
Ronald J. Smith .................. Moving expenses 6.0% $ 67,687(1) 0
Senior Vice President
</TABLE>

(1) Of this amount, $50,000 was repaid by Mr. Smith and $17,687 was forgiven
by the Company.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

A) Documents filed as a part of this report:
1. Financial Statements
The Consolidated Financial Statements, Notes thereto, Financial
Statement Schedules (none), and Accountants' Report thereon are
included in Part II, Item 8, of this report.

2a. Exhibits
(i) 3.1 Restated Articles of Incorporation of the
Company
(vii) 3.2 Amended Bylaws of the Company
(x) 10.1 * Microsoft 1995/1996 Channel Agreement dated July
1, 1995, as amended through January 1, 1996.
10.2 (Intentionally left blank.)
10.3 (Intentionally left blank.)
10.4 (Intentionally left blank.)
(iv) 10.5 * Microsoft January - June, 1993 Reseller Rebate
and Marketing Fund Agreement.
(v) 10.6 * Microsoft 1993/1994 Channel Agreement dated July
1, 1993.
(v) 10.7 * Rebate and Marketing Fund Addendum to the
1993/1994 Microsoft Channel Agreement dated
November 1, 1993.
(v) 10.8 * Amendment to the Microsoft 1993/1994 Channel
Agreement (appointment as a Major Chain
Reseller) dated November 10, 1993.
(v) 10.9 * Reseller agreement with WordPerfect Corporation
dated April 1, 1994.
(vi) 10.10 * Microsoft 1994/1995 Channel Agreement dated July
1, 1994.
(vi) 10.11 * Addendum to the Microsoft 1994/1995 Channel
Agreement dated July 1, 1994.
(vii) 10.11a Amendment No. 1 to the Addendum to the Microsoft
1994/1995 Channel Agreement (Appointment as a
Large Account Reseller) dated July 1994.
(vi) 10.12 * Follow up letter dated August 2, 1994, from
Microsoft regarding Microsoft 1994/1995 Channel
Agreement dated July 1, 1994.
(vii) 10.13 * Addendum to the 1994/1995 Microsoft Channel
Agreement dated January 1995.
10.14 (Intentionally left blank.)
10.15 Lease, as amended, dated June 9, 1988, between
Sammamish Park Place I Limited Partnership as
Landlord and DJ&J Software Corporation as Tenant
regarding the Company's administrative
headquarters. (Previously filed with
registrant's Form 10-K for the fiscal year ended
April 1, 1989, as Exhibit 10.46.)
10.16 First Amendment to June 9, 1988 lease between
Sammamish Park Place I Limited Partnership and
DJ&J Software Corporation dated
October 4, 1989. (Previously filed with
registrant's Form 10-K for the fiscal year ended
March 31, 1990, as Exhibit 10.46a.)

<PAGE>

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)

10.17 Lease dated March 23, 1992 between
Sammamish Park Place II Limited Partnership
as Landlord and DJ&J Software Corporation
as Tenant regarding the Company's
administrative headquarters. (Previously
filed with registrant's Form 10-K for the
fiscal year ended March 28, 1992, as
Exhibit 10.47.)
10.18 Lease Termination and Rent Payment
Agreement between Sammamish Park Place II
Limited Partnership as Landlord and DJ&J
Software Corporation as Tenant regarding
the Company's administrative headquarters.
(Previously filed with registrant's Form
10-Q for the first quarter of fiscal 1995
ended July 2, 1994.)
(vi) 10.18a First Amendment to Lease Termination and
Rent Payment Agreement between Sammamish
Park Place II Limited Partnership as
Landlord and DJ&J Software Corporation as
Tenant.
(vi) 10.18b Second Amendment to Lease Termination and
Rent Payment Agreement between Sammamish
Park Place II Limited Partnership as
Landlord and DJ&J Software Corporation as
Tenant.
(iii) 10.19 Lease dated March 23, 1989, between The CHY
Company as Landlord and DJ&J Software as
Tenant regarding the Company's Sacramento
distribution facility.
(iii) 10.20 First amendment to lease between The CHY
Company as Landlord and DJ&J Software, as
Tenant regarding the Company's Sacramento
distribution facility.
10.21 (Intentionally left blank.)
(i) 10.22 Lease Agreement dated January 7, 1988, with
Granite Properties, a limited partnership,
as Landlord and DJ&J Software Corporation,
as Tenant regarding Lancaster distribution
facility.
(i) 10.23 Master License Agreement dated February 12,
1988, with Staples, Inc. as Licensor and
DJ&J Software Corporation as Licensee,
regarding an exclusive right to sell items
in Staples' discount stores.
10.24 First Amendment to Master License Agreement
between Staples, Inc. and DJ&J Software
Corporation dated November 14, 1990.
(Previously filed with registrant's Form
10-K for the fiscal year ended March 30,
1991, as same Exhibit number.)
(viii) 10.25 Asset Purchase Agreement by and among
Software Spectrum, Inc., Egghead, Inc. and
DJ&J Software Corporation dated as of March
23, 1996 with Exhibits 4.11 and 4.12
thereto
10.26 (Intentionally left blank.)
10.27 Form of Indemnification Agreement between
the Company and its directors. (Previously
filed with registrant's Form 10-Q for the
third quarter of fiscal 1995 ended December
31, 1994.)
10.28 Form of Indemnification Agreement between
DJ&J Software Corporation and its
directors. (Previously filed with
registrant's Form 10-Q for the third
quarter of fiscal 1995 ended December 31,
1994.)

<PAGE>

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)

(vi) 10.29 Revolving Loan Agreement dated September
30, 1994, among Seattle-First National Bank
and U.S. Bank of Washington, National
Association, Egghead, Inc., and DJ&J
Software Corporation.

10.30 Revolving Loan Agreement dated September
30, 1993 among Seattle-First National Bank
and U.S. Bank of Washington, National
Association, Egghead, Inc., and DJ&J
Software Corporation. (Previously filed
with registrant's Form 10-Q dated October
16, 1993, as same exhibit number.)
10.31 (Intentionally left blank.)
10.32 (Intentionally left blank.)
10.33 ** Executive employment agreement between
Egghead, Inc. and Terence M. Strom dated
June 28, 1993. (Previously filed with
registrant's Form 10-Q dated October 16,
1993, as Exhibit 10.34.)
(ii) 10.34 ** Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Plan.
(ii) 10.35 ** Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Agreement between
Egghead, Inc. and Stuart M. Sloan dated
February 23, 1989.
(ii) 10.36 ** Egghead, Inc. 1989 Executive Retention Non-
Qualified Stock Option Agreement between
Egghead, Inc. and Stuart M. Sloan dated February
23, 1989.
(iii) 10.36a ** Amendment No. 1 to Egghead, Inc. 1989
Executive Retention Non-Qualified Stock
Option Agreement between Egghead, Inc. and
Stuart M. Sloan dated April 17, 1991.
10.37 (Intentionally left blank.)
10.38 (Intentionally left blank.)
(ii) 10.39 ** Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Agreement between
Egghead, Inc. and Ronald A. Weinstein dated
February 23, 1989.
(iii) 10.39a ** Amendment No. 1 to Egghead, Inc. 1989
Executive Retention Incentive Stock Option
Agreement between Egghead, Inc. and Ronald
A. Weinstein dated April 17, 1991.
(ii) 10.40 ** Egghead, Inc. 1989 Executive Retention Non-
Qualified Stock Option Agreement between
Egghead, Inc. and Ronald A. Weinstein dated
February 23, 1989.
(iii) 10.40a ** Amendment No. 1 to Egghead, Inc. 1989
Executive Retention Non-Qualified Stock
Option Agreement between Egghead, Inc. and
Ronald A. Weinstein dated April 17, 1991.
10.41 (Intentionally left blank.)
10.42 (Intentionally left blank.)
(ii) 10.43 ** Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Agreement between
Egghead, Inc. and Matthew J. Griffin dated
February 23, 1989.

<PAGE>

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)

(ii) 10.44 ** Egghead, Inc. 1989 Executive Retention Non-
Qualified Stock Option Agreement between
Egghead, Inc. and Matthew J. Griffin dated
February 23, 1989.
(iii) 10.44a ** Egghead, Inc. 1989 Executive Retention Non-
Qualified Stock Option Agreement between
Egghead, Inc., and Matthew J. Griffin dated
April 17, 1991.
10.45 (Intentionally left blank.)
10.46 (Intentionally left blank.)
10.47 (Intentionally left blank.)
10.48 ** Egghead, Inc. 1989 Employee Stock Purchase
plan. (Previously filed with registrant's
Form S-8 dated June 23, 1990, as Exhibit
10.)
10.49 ** Egghead, Inc. 1993 Stock Option Plan.
(Previously filed with registrant's Form
10-Q dated October 16, 1993, as Exhibit
10.31.)
(x) 10.50 ** Egghead, Inc. Restated Nonemployee Director
Stock Option Plan.
(x) 21.1 Schedule of subsidiaries.
(ix) 23.1 Consent of Independent Public Accountants.
(x) 24.1 Power of Attorney.
(x) 27 Financial Data Schedule.

Footnotes

(i) Previously filed with registrant's Registration Statement on
Form S-1, Registration No. 33-21472, as same Exhibit number.
(ii) Previously filed with the registrant's Form 8-K dated
February 23, 1989, as Exhibit numbers 10.1 to 10.13.
(iii) Previously filed with registrant's Form 10-K for the fiscal
year ended March 28, 1992, as same Exhibit number.
(iv) Previously filed with registrant's Form 10-K for the fiscal
year ended April 3, 1993, as same Exhibit number.
(v) Previously filed with registrant's Form 10-K for the fiscal
year ended April 2, 1994, as same Exhibit number.
(vi) Previously filed with registrant's Form 10-Q for the second
quarter of fiscal 1995 ended October 1, 1994.
(vii) Previously filed with registrant's Form 10-K for the fiscal
year ended April 1, 1995, as same Exhibit number.
(viii) Previously filed with registrant's Form 8-K dated March 23,
1996, as Exhibit number 2.1.
(ix) Filed herewith.
(x) Previously filed with registrant's Form 10-K for the fiscal
year ended March 30, 1996, as the same Exhibit number.
* Confidential portions of this exhibit have been omitted and
filed separately with the Commission pursuant to an
Application for Confidential Treatment under Rule 24b-2 under
the Securities Exchange Act of 1934. Each exhibit has been
marked to identify the confidential portions that are omitted.
** Designates management contract or compensatory plan or
arrangement.

2b. Form 8-K

Egghead, Inc., filed one report on Form 8-K, dated March 23,
1996, during the fourth quarter of its fiscal year ended
March 30, 1996, which reported on Items 5 and 7 of Form 8-K.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in
the city of Liberty Lake, State of Washington, on July 26, 1996.

EGGHEAD, INC.

By /S/ TERENCE M. STROM
------------------------------------
Terence M. Strom
President and Chief Executive
Officer

<PAGE>

Arthur Andersen & Co.

Exhibit 23.1

As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K into the Company's previously filed
Registration Statements No. 33-24978, (Egghead, Inc. 1986 Combined Incentive
and Non-Qualified Stock Option Plan); No. 33-29453, (Egghead, Inc. 1989
Employee Stock Purchase Plan); No. 33-33101, (Egghead, Inc. 1989 Executive
Retention Incentive Stock Option Plan); No. 33-59779, (Egghead, Inc. 1993 Stock
Option Plan); and No. 33-64033. (Egghead, Inc. Restated Nonemployee Director
Stock Option Plan).

Arthur Andersen

Seattle, Washington
July 29, 1996